Needless to say, the Trump Administration's decision not to slap additional tariffs on Chinese imports and to let Huawei's U.S. suppliers resume some of their sales to the Chinese tech giant is a positive for chip stocks.
However, the news, which has helped The Philadelphia Semiconductor Index (SOXX) rise about 2%, isn't merely a positive for the group simply because it could let Huawei's many U.S. suppliers resume selling chips for Huawei products that aren't considered national security risks, or even because it also lowers the odds of new trade restrictions that could hurt their sales to other clients.
It's also welcome news because it raises the likelihood that Beijing won't try to block major chip M&A transactions involving U.S. suitors.
Given how Qualcomm's (QCOM) planned $44 billion acquisition of Dutch chipmaker NXP Semiconductors (NXPI) was thwarted last year by the unwillingness of China's antitrust regulators (MOFCOM) to approve the deal amid heightened trade tensions, the Trump Administration's mid-May decision to ban the vast majority of chip, component and software sales to Huawei has raised fears that additional chip M&A deals will get the same treatment. One only has to look at how Mellanox Technologies' (MLNX) shares have traded in recent months to see how.
On March 11, the day that Nvidia (NVDA) announced it plans to buy Mellanox for $125 per share ($6.9 billion) in cash, Mellanox closed at $117.89. And in early May, Mellanox was trading above $120 per share. However, as news of the Huawei ban arrived, Mellanox shed close to 10% of its value in the following weeks, and spent much of June trading just above $110 per share.
Thanks to this weekend's news, Mellanox is up 1.4% in Monday trading to $112.25. That still leaves it well below Nvidia's buyout price, of course, and spells an interesting arbitrage opportunity for those willing to wager that MOFCOM or another regulator won't block the deal.
And looking at the chip sector overall, there still seems to be a fair amount of interest in additional consolidation. When I interviewed him in late April (before the Huawei news landed), Cypress Semiconductor (CY) CEO Hassane El-Khoury was easily more optimistic about potential chip M&A than when I talked to him in January, when he suggested that depressed prices for chip stocks were acting as a deterrent to dealmaking.
Five weeks after that April interview, Cypress announced that it was selling itself to German rival Infineon for $10 billion. To be fair, the fact that Infineon is a European company may have made its leadership less worried about announcing such a deal in the aftermath of the Huawei news than if it had been a U.S. firm. And the same may have held for Netherlands-based NXP's $1.76 billion deal to buy Marvell Technology's (MRVL) Wi-Fi/Bluetooth chip business, which was struck in late May. But either way, the deals suggest there's still plenty of interest among chip developers in additional consolidation.
Meanwhile, on Broadcom's (AVGO) June 14 earnings call, CEO Hock Tan said his company, which has bought quite a few chip suppliers over its history, remains "very active" in assessing chip M&A opportunities. And on Monday morning, U.S. chip equipment giant Applied Materials (AMAT) announced it has struck a deal to buy Japanese peer Kokusai Electric for $2.2 billion.
Given how up-and-down trade talks between Washington and Beijing have been over the last 12 months, there's still certainly a risk that the thawing of tensions signaled by this weekend's news will be followed by a fresh reversal. And it's also possible that outstanding tensions over issues such as technology transfers by U.S. firms to Chinese JVs could impact regulatory approvals for future deals.
But all things considered, any U.S.-based chip developer or equipment maker that was mulling a large acquisition has to be pleased with the latest trade news.