Qualcomm-NXP Semiconductors: Is It the Right fit?

(Bloomberg Gadfly) -- Qualcomm finally appears ready to make a big deal. Would a takeover of NXP Semiconductors be a deal worth the wait?

From the looks of it, investors seem excited about the prospect: shares of the $99 billion company shot up as much as 8.5 percent after the Wall Street Journal reported it was exploring a takeover of NXP, among other deal options.

It's not clear if that's NXP-specific enthusiasm or just relief that Qualcomm is finally taking some kind of strategic action after rejecting an activist investor's calls for a breakup last year. M&A was seen by many as the preferred strategy, but while rivals embarked on an unprecedented $180 billion-plus wave of takeovers, Qualcomm has largely sat on the sidelines, letting its pile of cash and equivalents swell to more than $31 billion.

Being selective is a virtue in a semiconductor industry beset by overheated takeover valuations. At the same time, though, the additional sales heft and cost-cutting opportunities that come with big acquisitions have been a coping mechanism for chipmakers grappling with rising production costs and growing competition. Sitting out has come at a cost: Analysts are projecting an 8 percent drop in Qualcomm's fiscal 2016 revenue after a 4.6 percent decline last year. The company trades at a discount relative to dealmaking peers such as Broadcom, Analog Devices and even NXP, which last year acquired Freescale Semiconductor for $16.7 billion including debt.    

If some kind of deal makes sense, is NXP the right target? It's certainly big enough to have an impact. NXP had a market value of almost $29 billion before popping on Thursday's deal news and is on track to report about $9.5 billion of revenue in 2016. As far as potential targets go, it also isn't terribly expensive. Say Qualcomm matched NXP's all-time high of $112.25, a more than 35 percent premium to the company's unaffected share price. That works out to about $46 billion including debt, or around 12.5 times NXP's projected Ebitda for 2016. The median multiple paid for big chipmaker deals announced in the last three years is 19 times.

The opportunity for earnings accretion is so great that even if Qualcomm were to pay something crazy like $150 a share in all cash, it could still make the deal math work even before accounting for potential synergies. So financially speaking, this seems like a worthy deal.

How about strategically? As the world's biggest supplier of chips used in the automotive industry, NXP would help lower Qualcomm's reliance on the smartphone market, where shipments are slowing and rivals are attacking its market share. But there is reason to question whether that's diversification in the right direction.

NXP has been open about the challenges it's facing in the automotive market right now. The company said in July that sales in that segment will be stagnant or may even decline in the third quarter. Texas Instruments had more positive things to say about the market for automotive chips, so it depends on who you believe to a certain extent, but the prospect of a plateaued auto market would add headaches to what is already bound to be a massive integration undertaking. 

Qualcomm is still reportedly evaluating other takeover options. Shareholders may wind up liking what it eventually comes up with even better. Either way, they're right to like the idea of a deal. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story: Brooke Sutherland in New York at bsutherland7@bloomberg.net.

To contact the editor responsible for this story: Beth Williams at bewilliams@bloomberg.net.