Qualcomm Plans to Drop $44 Billion NXP Deal, Blaming China Inaction After Tariffs
Posted July 25, 2018 7:09 p.m. EDT
Updated July 25, 2018 7:12 p.m. EDT
SAN FRANCISCO — Qualcomm said Wednesday that it expected to call off its $44 billion deal to buy NXP Semiconductors after Chinese regulators did not approve the transaction amid a trade war between Washington and Beijing.
Assuming no last-minute approval late Wednesday by the Chinese authorities, Qualcomm also said it would follow through with previously signaled plans to buy back up to $30 billion of its stock in a move to lift its share price.
The transaction failed after a series of trade moves by the Trump administration, including tariffs on numerous Chinese goods, and retaliatory measures from China.
Trade experts said China appeared to be withholding approval of the Qualcomm deal to gain negotiating leverage. Eight other jurisdictions, including the United States, had already approved Qualcomm’s purchase of the Dutch chip maker NXP; China was the exception, dragging the review process out to more than 20 months.
The developments followed actions by President Donald Trump to aid Qualcomm earlier this year. In March, he blocked a $117 billion hostile takeover bid for Qualcomm by a rival chip maker, Broadcom, after a federal committee said an acquisition would reduce research spending on wireless technology essential to national security.
Qualcomm announced its decision Wednesday afternoon along with quarterly earnings, which included revenue and net income above its predictions. The formal deadline for consummation of the acquisition was midnight Eastern time.
Steve Mollenkopf, Qualcomm’s chief executive, said the decision was a difficult one, triggered by a need to end the uncertainty surrounding the deal.
“We weighed that risk against the likelihood of a change in the current geopolitical environment, which we didn’t believe was a high-probability outcome in the near future,” he said during a conference call with analysts.
The outcome is a setback for Qualcomm. The company, based in San Diego, said it expected to have to pay NXP a $2 billion breakup fee.
Now Qualcomm must convince shareholders that it can expand its business without NXP, which was expected to speed Qualcomm’s expansion into chips for cars, mobile payments and other applications.
Chinese officials had no comment in advance of Qualcomm’s announcement Wednesday. NXP representatives also declined to comment.
Qualcomm gets most of its revenue from selling chips that help mobile phones communicate. But most of its profit comes from charging handset makers patent royalties based on a percentage of the wholesale price of their products.
That unusual business model has prompted a series of legal battles with antitrust authorities and customers, including Apple. In one positive development for Qualcomm, Mollenkopf disclosed that it had received a $500 million payment from another licensee that has been resisted paying royalties. Qualcomm has not disclosed the identity of the company, but analysts believe it is China’s Huawei.
Mollenkopf’s go-it-alone strategy rests in large part on 5G, the next generation of cellular technology. Qualcomm predicts that 5G will have many uses beyond increasing the speed of smartphones, including car-to-car communications to improve safety, virtual reality goggles and wireless alternatives for home internet service.
Qualcomm built a lucrative head start over rivals in delivering wireless chips when the current generation of 4G networks began arriving in 2010. The company believes it has a comparable technology edge in 5G, which poses technical challenges that include potentially relying on higher broadcast frequencies never used previously in cellular networks.
The company said it was rapidly surmounting those obstacles, paving the way for some 5G services to begin arriving in the first half of 2019. Qualcomm engineers recently showed a software simulation indicating that a typical 5G user in San Francisco would get a 17-fold increase in average download speeds.
“With every passing week, carriers around the world are announcing an expansion of their 5G rollouts, and we are a partner to nearly all of them,” Mollenkopf said.
But some analysts questioned the strength of demand for 5G services as well as Qualcomm’s lead over rivals. Intel, for example, has recently succeeded in placing wireless chips in some Apple smartphones and has trumpeted its own 5G advances. Qualcomm disclosed Wednesday that it expected Apple to use only competing chips for its next iPhones.
Amid the challenges, Qualcomm said its core business was improving. The company reported Wednesday that quarterly net income increased 41 percent on a 4 percent rise in revenue.
Besides chips for smartphones, Qualcomm has said it has a backlog of orders from chips used in cars and other non-phone applications totaling $5 billion, up $2 billion from January.