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Qualcomm- A Gift From China?

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Lessons learned after the Qualcomm-NXP failed merger.


Qualcomm is the almost 90 billion dollar semi-conductor giant. Shareholders seem to be rejoicing because of an event that would usually make for the polar opposite. Their 44 billion dollar agreement with NXPI looks as if it’s going to be abandoned, and instead, Qualcomm’s “Fort Knox-like” cash reserves will be deployed in a different manner. The company announced after hours, up to a 30 billion dollar buy back. This, along with a strong earnings report at that same time, has given investors two reasons to pour into Qualcomm in nightly trading, causing it to surge almost 7%. The market is definitely over the moon about this deal failing, evident by this bump, but what does it mean now for investors of Qualcomm?

Let’s start with the negatives of this deal falling through. NXPI would have given Qualcomm a large EPS boost, with NXPI trading very cheaply at around 10x earnings.This deal was expected by management to add $1.50 to their EPS by 2019. NXPI also makes chips that don’t necessarily overlap with Qualcomm’s mobile device heavy lineup. That level of concentration could cause for them to be hurt by any slowing demand for mobile devices. This would’ve provided some much needed diversification, as well as new areas for future growth. NXPI is also very much into chips for self diving cars, which could be a large avenue of growth for the future. Also adding on, a large number of synergies and cost cutting could’ve been achieved if the deal passed. The deal, because of Qualcomm’s mountain like cash reserves, would have resulted in limited debt as well. And finally, Qualcomm will now pay NXPI a breakup fee of 2 billion dollars for the deal failing. All this alone would make this deal seem like it is crucial to go through.

Now though not so much. With this 30 billion dollar share buyback, Qualcomm is going to be boosting their EPS, as at the moment, if they were to buy back 30 billion in stock, they would essentially take out 1/3 of their share count while being valued at around 90 billion. One could argue it would boost eps even more than the projected deal would. And as far as synergies, Qualcomm has done a good job cutting costs in their own business in the past, and will be able to continue that, merger or not. Also, Qualcomm was paying a handsome premium on NXPI, even raising it within the last half year. Semis are in, and have been in one of the biggest bull runs ever. Purchasing so expensive in a highly cyclical business could’ve presented some risks.

With this large buyback, Qualcomm is continuing into the future this shareholder friendly atmosphere, through returning cash to shareholders. Already with a dividend over 4% and a buyback 1/3rd of its market cap, it seems like Qualcomm may finally get some love it deserves.

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