In presenting the quarterly results for the third quarter of fiscal 2018, Qualcomm stated that "we intend to terminate our purchase agreement to acquire NXP if the agreement expires today at the end of the day until significant new developments occur”. CEO Steve Mollenkopf explicitly thanked his colleague Rich Clemmer for his efforts over the past 21 months to make the deal possible. At the same time, he explained that he saw no more opportunities in the "current political situation".
In April, the two companies had already set a final deadline of July 25 to complete the $44 billion acquisition. While Qualcomm has its headquarters in San Diego, California, almost two-thirds of sales in 2017 were generated in China. Nearly 40% of NXP sales in 2017 came from China.
As always after failed transactions, the first search will be for a culprit in this case, this role is likely to be assigned to US President Donald Trump due to the trade war that has begun with China. But even though Trump's chip boycott by the Chinese electronics company ZTE and the resulting production stop have caused a lot of oil to burn, it should not be forgotten that Qualcomm's dispute with China began much earlier. The Chinese antitrust authority investigated Qualcomm as early as 2015 and found that its patenting practices violated antimonopoly laws. Qualcomm was fined $975 million at the time.
Qualcomm's decision to abandon the deal was followed by last-minute lobbying by high-ranking US politicians, including Secretary of the Treasury Steven Mnuchin and Secretary of Commerce Wilbur Ross, who tried to convince their Chinese counterparts to separate the deal approval process from the current disruptions, US industry managers said.
Mnuchin spoke with Chinese Vice Minister Liu He to get approval, and Ross did the same with China's ambassador to the United States, Cui Tiankai. US politicians argued that Qualcomm's decision should be based on the deal's individual criteria.
Consequences for Qualcomm
Since the announcement of the acquisition in 2016, Qualcomm has come through turbulent times. The share price has been under strong pressure since January 2017, when its long-time customer Apple and the Federal Trade Commission filed lawsuits accusing Qualcomm of abusing its market power and patent position to levy unjustifiably high royalties. Then came the defense against Broadcom's takeover attempt - ironically with the help of the US government - and layoffs of employees because shareholders had to be promised higher returns.
Now Qualcomm had to transfer 2 billion dollars "exit fee" to NXP until 3 p.m. german time at 26th of July.
As in the past, Qualcomm is at the forefront of technology in the next generation of 5G mobile phones. The Californians can now provide a functioning mmWave solution for mobile radio, which until not so long ago was considered hardly feasible. Until now, mmWave signals have not been used for mobile wireless communications due to different challenges - these include materials, form factor, industrial design, thermal management and regulatory requirements due to radiated power.
The problem is the smartphone market, which is no longer growing as in previous years, and the SoC developments of Apple, Huawei and Samsung. NXP, with more than 14,000 different chips used in cars, mobile payment and other applications, was to serve as a fast track to diversifying Qualcomm's business.
Still in the room, or again after the failure of the NXP acquisition, is the possibility that Paul Jacobs, former CEO and son of one of the company's founders, Irwin Jacobs, could make an offer to privatize the chip manufacturer. Jacobs, along with Qualcomm ex-CTO Matt Grob and ex-President Derek Aberle, who was fired at the end of December 2017 and was responsible for Qualcomm's licensing business, has now formed a new company called XCOM, which will focus on 5G technologies. While Jacobs will serve as CEO, Aberle will become COO and Grob CTO of XCOM. Aberle confirmed that founding XCOM would not mean that Jacobs and he would stop looking for investors to buy out Qualcomm. If successful, XCOM could merge into Qualcomm or be purchased by Qualcomm.
Nevertheless, we must not forget that Qualcomm has made significant progress outside the mobile phone business even without NXP. The current order backlog in the automotive industry alone amounts to 5 billion dollars. In addition, Qualcomm plans to buy back up to $30 billion in shares to increase its share price. This was also confirmed in the presentation of the quarterly results.
The consequences for NXP
The consequences for NXP are already more dramatic. 21 months of uncertainty about the future of the company were more than unpleasant for employees and above all customers. Companies often freeze certain expenditures before acquisitions, especially the company to be acquired, such as hiring personnel, marketing and/or R&D. NXP, for example, has closed its FTF Developer Conference, one of the best events for embedded/industrial engineers.
This situation of uncertainty gave rivals the opportunity to take over staff and businesses. The sales teams of NXP's largest competitors in the automotive industry - Infineon, ST Microelectronics and Texas Instruments - have been anything but idle in recent months to convince (former) NXP customers of their own solutions. And what doesn't make things any better from the Dutch point of view, especially in the automotive and industrial sectors there are comparatively long product cycles, once you're out, it takes time until you get another chance at a design-in.
This is confirmed by the revenue development of TI, ST, Infineon and NXP over the last four quarterly reports compared to the identical quarter of the previous year. While NXP was the only one of the four chip manufacturers mentioned above to experience a year-on-year decline in sales in three of four quarters, TI and ST posted double-digit growth throughout, with Infineon still growing by 8.25 % per quarter on average. TI reported on average 11.5% growth and ST even 21.44%. NXPs "growth" in the last 4 quarters on average: -3.4 % (+2, -1.6, -5 and -9 %).
After all, Qualcomm will pay the Dutch company an exit fee of $2 billion. If NXP used this money to buy back shares at the current price, it could increase earnings per share by about 5 percent. This could bring Qualcomm's current share price, which has closed at just $98.37, closer to Qualcomm's $127.50 takeover bid.
NXP continues to have the industry's largest portfolio of MCUs, MPUs and SoCs combined with sensors and interconnects for new applications such as autonomous control of drones, vehicles and industrial solutions.
There is no doubt that NXP also has a personal loser: CEO Rich Clemmer, who was looking forward to his retirement in addition to the usual merger bonus (rumored to be $400 million). He must continue at least temporarily, when there will be a younger successor is in the stars. It is unlikely that NXP has actively built a successor for Clemmer in recent years, as Qualcomm had expected a successful acquisition until the end.
Does Broadcom want to take over NXP now?
Of course, there are other possible deals besides Qualcomm's acquisition. The logic of connecting NXP's automotive and industrial business to a mobile chip provider is not fundamentally out of line just because the Qualcomm deal has collapsed. Broadcom's frenzied CEO Hock Tan, who has tried in vain to buy Qualcomm, may be interested, especially as Broadcom is always welcome at China's major infrastructure provider Huawei & Co. Apparently, the former Singapore based company, like Infineon and NXP, which hired former Qimonda CEO Kin Wah Loh as sales manager and networker in China in 2011, understood early on how to make trustworthy deals in China and that the Beijing Politburo with its long arm is always at the table with the large state-owned corporations. Even though NXPs and Kin Wah Loh's paths parted at the end of 2015, the Malaysian-born has set up many deals in the Middle Kingdom. NXP would certainly benefit from a Broadcom acquisition in order to shift its rising research and development costs to a larger portfolio.
The positive thing about the end of the Odyssey is that it is now finally over and security for customers and employees is guaranteed again. There is no doubt that both Qualcomm and NXP have suffered in the last 21 months. Nevertheless, both companies have the know-how and the personnel to successfully position themselves in the market in the future as well.
Qualcomm is leading the transition to AI and 5G, including the introduction of mmWave for mobile applications. NXP may use the termination fee not only to repurchase shares but also to finance additional development and marketing programs.
If the deal had gone through, it would have been better for both sides, of course: Qualcomm would have gained access to a large MCU portfolio, industry-leading NFC technology, a global distribution network and major OEMs in both the consumer and industry segments. NXP would have gained access to Snapdragon technologies such as Adreno GPU, Hexagon DSP and Spectra ISP, leading solutions for wireless technologies such as 5G, NB-IoT, Wi-Fi and Bluetooth, and developments in machine learning and AI. On the other hand, both companies are already working closely together today, and perhaps NXP can license interesting IPs such as Qualcomm's Adreno GPU or Hexagon DSP.
The mood for the end of the world is therefore not in order despite the broken deal, even if the current black clouds are likely to remain in the sky for some time to come. I think Qualcomm should now focus on finally resolving the royalty dispute with Apple. As a result, the quarterly results were also presented: In its next iPhone generation, Apple will no longer use Qualcomm modems, but will rely 100% on Intel.