Qualcomm's Upbeat Quarter Heightens Anticipation of Acquisitions

NXP Semiconductor has been eyed as a prospective target for an expansion minded chip maker.
By Bob O'Brien ,

Qualcomm (QCOM) - Get Report shares have jumped 7% Thursday as the chip maker enjoys bragging rights about a surprisingly upbeat quarterly report, a development that's likely bolstering chatter that the company may be in the market for a major acquisition.

The chip maker sat out the consolidation wave in the chip industry that saw Avago Technology roll up Broadcom (AVGO) - Get Report and Intel (INTC) - Get Report snag Altera. Talk lately has linked Qualcomm with an interest in NXP Semiconductor (NXPI) - Get Report , talk that's only intensified after the latter reached a deal to divest a slower growing chip business.

A link up with NXP could make sense both because it would push Qualcomm into the Internet of things business, and afford some tax efficiencies, as it would allow Qualcomm to utilize offshore capital to buy the Netherlands-based NXP.

Qualcomm has some $30 billion on its balance sheet, which would match up with NXP's current market cap.

Meanwhile, Cramer reported that Blackstone Group (BX) - Get Report , the huge asset manager, has whittled its position in NXP to about 2% of the outstanding shares. Blackstone had been holding a nearly 10% stake in NXP as a result of its long-standing ownership of Freescale Semiconductor, the chip maker that NXP closed on in December. There were reports last month that NXP insiders had conducted a secondary offering of the company's shares, amounting to nearly 15 million shares, though the identity of those holders was not confirmed at the time.

Qualcomm has been a source of intrigue about its interest in a major acquisition for several months, as Wall Street has anticipated further consolidation in the chip business. Qualcomm has largely lost its avenue into the iPhone business as Apple (AAPL) - Get Report has sought to diversify its supply chain.

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A link up with NXP would help Qualcomm move beyond the business of supplying chips for PCs and mobile devices, a business that's come to be regarded as a near commodity business.

NXP itself plans to exit its exposure to the PC/mobile business with the sale it announced last month of its standard product division to China's JAC Capital for $2.75 billion, a deal that fetched a loftier price than analysts previously anticipated.

That transaction is expected to help NXP pay down some of the $9 billion in debt on its balance sheet, the remnants of both its and Freescale's days as properties of private equity owners. An improved balance sheet only buffs NXP's appeal as an acquisition target.

NXP's business is geared more toward the Internet of things model. Its chips are widely used in automobiles. Estimates say that premium cars have something on the order of $1000 in chip products in their construction, and NXP supplies some $300 in chip content per vehicle. NXP is expected to reported revenue growth of 5% quarter over quarter for its fiscal second quarter. (Analysts are using the quarter-over-quarter comparison rather than the more conventional year over year analysis because the December closing of the Freescale acquisition would distort year-over-year comps.)

Qualcomm gets to brag about its own second quarter performance turned in late Wednesday, which showed its first year over year boost in revenue after four quarters of slack performance. Qualcomm shares have more often than not traded lower on earnings releases, having declined on 10 of its last 12 profit reports. But now the company will presumably be dogged ever more relentlessly about what it plans for the future, and if those include an acquisition.

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