Hard questions are arising. It comes back to finding the justification for this deal. Does this deal really make sense for Qualcomm?
Acquisitions used to be closely guarded events held behind closed doors with severe penalties for any leakages to even news organizations. Not anymore.
The semiconductor industry has known for several weeks now that Qualcomm Inc. wants to buy Dutch chipmaker NXP Semiconductor N.V. A deal could be announced this week, turning Qualcomm overnight into the largest supplier of chips to the global automotive industry and the world’s third largest chip company behind Intel and Samsung.
Talk of a Qualcomm-NXP deal comes in the wake of historic consolidation amid a sense of urgency to improve operational competitiveness in a maturing landscape.
Initial speculations from a Wall Street Journal report were that Qualcomm would pay about $30 billion for NXP but the target’s market value has since shot up above $36 billion.
Qualcomm, if it wants NXP, must now be ready to pay between $37 billion and $40 billion, according to analysts. Such an offer would eclipse the $37 billion Avago paid for Broadcom and the $30 billion SoftBank shelled out for ARM Holdings Plc.
The price may not matter. Investors and shareholders have been applauding the news by jacking up both parties’ stock prices, and the deal could benefit both companies.
For its part, Qualcomm would get a much more diversified revenue base and expand its exposure to the more reliably predictable automotive industry and away from the fickle, though lucrative, consumer electronics market.
Whether hype may be pushing valuations today is a question few any longer ask in today’s exuberant, cash-flush corporate environment. American companies, especially, have hundreds of billions of dollars locked up in overseas accounts, yielding minimal returns.
Bankers and analysts, too, are pushing for ever larger deals and encouraging companies to use cash hoards for acquisitions. In such an environment, hype and ego cannot be ruled out.
It may even be evident in NXP’s market value, which has shot up more than 43 percent in the last year with a large percentage of the increase happening only since September 29.
The deal could cap a long career for NXP’s president and CEO, Richard Clemmer, who at 64 years old has led or engineered some of the industry’s more interesting acquisitions and spin-offs.
On the other hand, Qualcomm’s younger executives, Paul Jacobs (54), executive chairman, and Steve Mollenkopf, CEO, get to add an admirable record to their professional resumes.
The Qualcomm-NXP deal is not any different from events in the larger economy, though.
News broke last weekend that AT&T had struck a deal to pay $85.4 billion for Time Warner, more than double the value of what’s been projected as the semiconductor industry’s largest transaction.
In today’s testosterone-infused world of mega-mergers and bloated executive egos, even the staid semiconductor market has gone into overdrive with its own raft of ever-larger deals that boggle the mind in both their complexities and the premium demanded by sellers and agreed to by buyers.
When the dust of the transaction settles, Qualcomm must deal with certain realities, top of which would be the complexities inherent in purchasing a European semiconductor supplier that is itself still assimilating a large acquisition.
In December, NXP closed the $12 billion purchase of Freescale Semiconductor, a North American automotive IC rival.
The integration of Freescale into NXP continues even today, however, and will take years as the company noted in a filing with the U.S. Securities and Exchange Commission:
The Merger involved the integration of two companies that previously operated independently with principal offices in two distinct locations. We are devoting significant management attention and resources to integrating the companies … We expect the full integration process to take several years, with the initial focus on management consolidation and process integration. Work streams are underway in all of our business lines and the support functions. Integration activities that likely will have a multi-year horizon include, but are not limited to, harmonizing brands, product and vendor selections, system integration and supply chain integration.
Warning statements like the one above are usually buried in obligatory regulatory reports and do not figure prominently in public discussions.
Qualcomm knows it must grapple with the difficult task of absorbing an enterprise with a vastly different business model operating in a different cultural environment and with a large presence in a market with starkly different dynamics.
The company will also have to enter market segments where it has limited experience and initiate into a fabless manufacturing environment a company that has numerous production facilities spread all over the world.
How will history judge this union and will the payoff for Qualcomm investors justify this investment?
Next Page: The case for NXP selling itself