As chipmaker Qualcomm (QCOM) - Get QUALCOMM Incorporated Report grabs NXP Semiconductors (NXPI) - Get NXP Semiconductors N.V. Report for nearly $50 billion in the biggest semiconductor deal ever, much is at stake.
Qualcomm has agreed to acquire NXP Semiconductors for $47 billion, or $110 per share, the companies jointly announced Thursday. The San Diego, Calif.-based chipmaker is buying NXP to further boost its footprint in the automotive, industrial and Internet of Things segments as it looks for new sources of growth that can offset with its core smartphone business that has become somewhat stagnant.
"Qualcomm needs NXP more than NXP needs Qualcomm," Jack Mohr, TheStreet's chief investment strategist and co-manager of our Action Alerts PLUS model portfolio, wrote in recent note reiterating his $110 price target for the stock.
Action Alerts PLUS, which Mohr and Jim Cramer co-manage as a charitable trust, counts NXP among its holdings. Mohr wrote that the firm "represents a rare opportunity for the lumbering Qualcomm to transform its business model, diversify away from the low-margin, low-growth smartphone market and towards high-margin, high-growth, highly lucrative end markets across auto, secured devices, connectivity and secure payments." (Click here for a free 14-day Action Alerts PLUS trial and read his whole analysis.)
Raymond James analyst Tavis McCourt said Qualcomm "basically had three choices" -- seal a transformational deal, do a series of transactions or wait on the sidelines for opportunities to buy back stock. He said that of all of the potential needle-moving deals, buying Netherlands-based NXP made the most sense in that it will diversify Qualcomm's business while smartly using the chip giant's offshore cash. "The downside is -- this is it. This is your business for the next five years," McCourt said.
Historically, Qualcomm has turned to internal development rather than M&A for growth. The company's recent meaningful acquisitions include its $3.1 billion purchase of wifi chip company Atheros Communications Inc. in 2011 and its $2.2 billion buy of CSR plc last year that gave them access to the bluetooth chip market.
"[Neither] one was an absolute home run," he further said, adding that Qualcomm will likely now limit its buybacks for the next three to five years and cap M&A.
Qualcomm is purchasing NXP for a relatively cheap price of $110 per share -- a mid teens multiple of the target's forward earnings -- but it will likely face significant integration risks. The different nature of the two chipmakers' key end-markets, coupled with their distinct business models involving customer base won't make NXP an easy acquisition for Qualcomm. They may also have to deal with a cultural gap.
While pressure will be on Qualcomm to demonstrate its ability to integrate the acquisition that will dramatically change its business, the semi doesn't exactly have a benchmark.
"Qualcomm's never done anything transformative," said Bernstein Research analyst Stacy Rasgon. "It's going to be a beast to bite off."
Only recently did Qualcomm start to acknowledge the need to diversify beyond its core smartphone business that was starting to experience slowing growth by tapping into adjacent areas like automotive and networking, Rasgon further said.
In fact, Qualcomm invited the attention of activist investor Jana Partners in 2015 and subsequently launched a strategic review. After weighing the idea of splitting its chip business from patent licensing division, the semi ultimately decided to remain intact.
The chipmaker had largely stayed silent during the ongoing wave of consolidation that include marriages between Broadcom (AVGO) - Get Broadcom Inc. Report and Avago; ARM Holdings (ARMH) and SoftBank; Freescale and NXP; Altera and Intel (INTC) - Get Intel Corporation Report ; and Linear Technology (LLTC) and Analog Devices (ADI) - Get Analog Devices Inc. Report , among others. Semis have rushed to M&A in hopes of finding new sources of revenue growth especially in the backdrop of cheap cost of borrowing capital.
"The idea of them doing a deal is not new," Rasgon said, adding that the market had been awaiting Qualcomm to make a move on the M&A front.
"They made efforts in this area before," said Argus Research analyst James Kelleher. "It's a proactive acquisition to get them into markets" where Qualcomm doesn't have a strong presence.
Shares of Qualcomm climbed up 4.7% mid-day Thursday to $71.40. NXP inched up 0.7% to $99.39 midday.