Update October 3. Thursday the Wall Street Journal reported that Qualcomm (QCOM) was in talks to buy NXP Semiconductor (NXPI) for somewhere around $30 billion or roughly $90 a share. On Friday Bloomberg reported that NXP had hired an investment bank for advice on any offer.
For Qualcomm the deal would be a smart move. Growth in smartphones is slowing, posing a big challenge for Qualcomm to find more growth outside its core business. Buying NXPI would give Qualcomm immediate access to the automotive semiconductor market that Qualcomm (and everybody else) has targeted as a possible source of growth. As I’ve flagged in my Powerpoint presentations on the sector, the automotive semiconductor market is the fastest growing chip market now and is likely to stay so for at least the next five to ten years as car makers add more silicon to their products to turn them into Internet-connected entertainment and information platforms, and as they add chips to control everything from braking to fuel flow. Add on the possibilities for semiconductors in driver-assist technologies and maybe even a self-driving car and the automotive chip market is very attractive to any chip maker looking for growth. (Which is pretty much everyone.)
According to IC Insights the compounded annual growth rate for automotive semiconductors from 2013 to 2018 will be 10.8%. That compares to a 6.13% compounded annual growth rate for semiconductors as a whole. (And just 3.3% for computers and 6.8% for communications.)
With such an acquisition Qualcomm would go from a company with 90% of its business linked to the slowing smartphone market to a company with just 68% of sales in that sector, according to UBS.
Oh, and one last advantage to the deal from Qualcomm’s perspective: The company would be able to use the $31 billion in cash on its balance sheet to finance the deal. About $29 billion of that money is now trapped off shore and the deal would give Qualcomm a way to put it to use without repatriating the money and paying U.S. taxes on it.
The deal isn’t nearly as attractive–at this price–to NXP shareholders. I’ve seen analysts put a target price of anywhere from $115 to $170 a share on the company. At $90 a share or even at the $102.76 close today, October 3, Qualcomm would be getting a huge bargain. After all NXP Semiconductor’s 52-week range tops out at a closing price of $104. The shares have traded higher than that on an intraday basis and in June 2015 the shares traded at $114.
NXP Semiconductor shares have climbed after the Wall Street Journal story to above the reported Qualcomm offering price because traders are looking for another offer from, say, Broadcom (AVGO) or Texas Instruments (TXN). I’ve even heard mention of Intel (INTC) as a prospective buyer.
Wall Street thinks that Qualcomm has the inside track on any acquisition–assuming there is one. And I’d have to agree. Other possible acquirers are coming off big recent deals (Broadcom) or are so big and diversified (Intel and Texas Instruments) that buying NXP wouldn’t give their shares (which would be also the shares of current NXP stock owners after any deal) that same kind of bump that Qualcomm would get from a deal that would be clearly transformative for the company.
Which is why Wall Street has been busy raising its target price for Qualcomm. The stock closed at $67.11 today, October 5, but recent target prices have been in the vicinity of $75 to $80.
But they all do come with a caveat: Analysts are putting their $75 or $80 target prices on Qualcomm–if the company can buy NXP Semiconductor at $115 or $120 or less. At that level the acquisition would add 20% to 25% to Qualcomm earnings.
I own Qualcomm in my Dividend portfolio. I’m certainly holding the shares during all this M&A excitement and I’d buy more if the deal goes through at something like the analysts’ decent price. If you’re inclined to gamble, I’d say a bet that Qualcomm will be able to make this deal is a reasonably risky investment given the potential upside. At the current $102 and change, buying NXP isn’t extremely risky. The stock is likely to pull back if the deal turns out to be just a reporter’s nifty idea, but the stock isn’t that extended that any drop would be extreme.