Seven months after Qualcomm (QCOM) and NXP Semiconductor (NXPI) announced that the former is buying the latter for $47 billion in cash and assumed debt, it's still far from clear exactly when the deal will close, and on what terms. Ongoing regulatory reviews are partly responsible for this, as are grumblings by NXP investors who feel that the Dutch chipmaker now deserves a higher sale price.
The regulatory reviews are unlikely to yield major objections to the tie-up, given the limited overlap between Qualcomm and NXP's product lines. But an NXP investor push for a higher price could very well pay off, given who appears to be supporting it and everything that has transpired since October.
On Friday morning, the European Commission said Qualcomm hasn't offered any concessions to help the deal clear a preliminary review that ends on June 9. If the EC doesn't clear the deal unconditionally by that date, there will be an extended review that could last up to four months.
Sources tell Reuters that NXP rivals want guarantees that they'll be able to continue using NXP's Mifare technology. Mifare is used by NXP microcontrollers that have gone into billions of smartcards--used to do things like enter subway stations, gain access to buildings and make loyalty card transactions--along with millions of smartcard readers. It's also used by the NFC radios built into smartphones to support Mifare-based services, and has been licensed by SIM card leader Gemalto and NXP rival STMicroelectronics (STM) , among others.
Since it would only involve a commitment to maintaining the status quo, and since NXP's smartcard chip business has been doing quite well under this status quo, guaranteeing third-party Mifare access will continue doesn't seem like the kind of concession that Qualcomm would be deeply reluctant to give, if pressed on the matter.
And it's also not likely that regulators will push for major asset sales in order to approve the deal, given how complementary Qualcomm and NXP's product lines are. There is some overlap between the companies' automotive processor offerings, but this is a highly competitive market featuring Nvidia (NVDA) , Intel (INTC) and several other chipmakers.
There is a bit of risk that recent regulatory probes of Qualcomm's licensing practices, which have partly been related to the links between its chip and IP licensing businesses, could slow approval. But unlike Qualcomm's mobile processor/modem business, NXP's main product lines don't use Qualcomm's core 3G/4G cellular IP. A commitment not to let cellular licensing deals and negotiations impact either the supply of NXP products or the licensing rights currently passed on by using them should be palatable for both sides.
Regulatory reviews of the deal could still take a while to play out. In addition to the EC, regulators in South Korea, Japan and elsewhere still have to render judgment (U.S regulators approved the deal in April). But that's par for the course for a deal of this size.
The larger concern, at least from the perspective of Qualcomm shareholders, is that NXP investors will force a renegotiation of the deal. Earlier this week, Bloomberg and CNBC reported activist Elliott Management, which has a long history of getting what it wants from the tech companies it takes stakes in, has teamed with other big investors in pressing NXP to seek a new deal.
NXP shareholders approved the existing deal in January. But a sale also requires at least 80% of NXP's shares to be tendered at Qualcomm's $110 offer price. As of May 30, only 14.1% of shares had been tendered. Moreover, it's possible for tendered shares to be withdrawn prior to the expiration of Qualcomm's tender offer.
Qualcomm's offer price represents a 33% premium to where NXP traded on Sept. 28, the day before the first deal reports emerged. But since that date, the Philadelphia Semiconductor Index has risen 36%.
In the wake of this chip stock run-up, Qualcomm's offer price values NXP at lower multiples than many of its peers in the microcontroller and analog/mixed-signal chip markets. Whereas NXP is valued at 15 times a 2017 EPS consensus of $7.33, Texas Instruments (TXN) is now valued at 21 times its 2017 EPS consensus and Microchip Technology (MCHP) at 18 times its fiscal 2018 (ends in March 2018) EPS consensus.
Elliott and its pals are likely well aware of this. They're probably also aware that Qualcomm's shares have fallen 14% since the NXP deal was inked due to regulatory probes and a bitter licensing spat with Apple (AAPL) that has led Apple to instruct its contract manufacturers to stop making iPhone royalty payments to Qualcomm. And that the decline would be larger still if the NXP deal--a deal that's being paid in large part via offshore cash, that greatly increases Qualcomm's exposure to growing automotive and embedded/IoT markets, and which should boost its annual cash flow by well over $2 billion--was inked.
That makes for quite the bargaining position. And with NXP shares having closed on Friday at $109.15, markets might not be fully appreciating the potential for Elliott to once more have its way.