In Oct 2016, Qualcomm entered into a definitive agreement with NXP Semiconductor to buy the latter. Per the deal, Qualcomm will pay $110 per NXP Semiconductors share in cash reflecting an enterprise value of approximately $47 billion (equity value of $39 billion) for the Dutch chipset maker. The deal is anticipated to be closed by the end of 2017 subject to all necessary regulatory approvals.
Qualcomm has decided to float a new foreign subsidiary called “Qualcomm River Holdings B.V.”, based in Amsterdam, which will issue tender offer to acquire NXP Semiconductors. Flotation of foreign subsidiary is necessary to avoid paying tax on its offshore cash. As of Jun 30, 2016, Qualcomm had $2.4 billion of cash and equivalents in the U.S., and another $28.6 billion as offshore cash. The company doesn’t need to pay tax on the offshore cash, as long as it is reinvested offshore.
Qualcomm expects the transaction to be significantly accretive to its non-GAAP EPS immediately upon completion. Further, the company expects to generate $500 million of annualized run-rate cost synergies within two years after the transaction closes.
Benefits to Qualcomm
The major positive of the deal is that it will enable Qualcomm to diversify its business model. The company is the leader in mobile chipset market. However, in recent years, markets for smartphones and tablets are gradually slowing down. Additionally, these chipset businesses are low-margin in nature. For last couple years, the company’s business has remained stagnant.
On the other hand, NXP Semiconductors manufacturers chips for next-generation automotive, industrial and Internet of Things (IoT) segments. Therefore, acquisition of NXP Semiconductors will enable Qualcomm to diversify into highly lucrative end markets such as auto, secured devices, connectivity and secure payments. These segments offer high-margin businesses with strong potential for future growth.
This transaction will place Qualcomm in the second position after Intel Corp. in terms of sales in the broader global semiconductor market. Moreover, the combined entity will also become a formidable challenger to other large semiconductor firms like Broadcom Ltd., Analog Devices Inc. and ARM Holdings.