Qualcomm-NXP Deal Reportedly Gets China Regulators' Approval

According to a Bloomberg report, the South China Morning Post has claimed that regulators of China have approved Qualcomm Incorporated’s QCOM $43 billion deal to acquire NXP Semiconductors N.V. NXPI.

China was the only nation opposing the buyout deal on issues relating to antitrust concerns. With the clearance, Qualcomm has moved past the last stumbling block, having earlier received approvals from eight of the nine global regulators.

The go-ahead decision from the China’s authorities was pending for more than 18 months, leading to increased speculation regarding the fate of the deal. The approval was put on hold by China’s Ministry of Commerce as a bargaining tool to seek more concessions from the United States after the two nations were engaged in a bitter trade war. Moreover, the regulators had to contend with domestic chip companies, which raised objections to the deal arguing that it was a potent threat to their survival. 

The issue further spiraled into a full-fledged conflict when the U.S. government banned sale of components by American firms to the China-based telecom equipment maker, ZTE Corp. Citing a breach of an agreement inked last year, the U.S. Department of Commerce slapped a seven-year ban on sale of various components to ZTE after it was caught illegally shipping goods to Iran. This crippled the operations of ZTE and threatened its survival.

Although President Trump refused to budge initially, he made a sudden turnabout and handed a lifeline to ZTE with the U.S. administration reaching a settlement. This included a fine of $1.3 billion on the firm, restructuring of its management and hiring of American compliance officers. In return, the Commerce Department lifted the seven-year ban on ZTE related to the purchase of components from U.S. manufacturers.

Industry observers opine that the long-delayed Qualcomm-NXP deal approval from China was hastened by a favorable decision on ZTE. The green signal from all global regulatory authorities soothed investor nerves from the on-again off-again negotiations for a game-changing merger. Qualcomm will now aim to close the transaction before the July deadline, failing which it risks paying a compensation of $2 billion for the termination of the deal.

The transaction will help Qualcomm to diversify its revenue stream, which primarily relied on chip sales to mobile phone manufacturers that is fast becoming a saturated market. NXP has a considerable presence in the budding market for automotive chips. Therefore, the acquisition of NXP 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 growth.

Over the past six months, Qualcomm has incurred a loss of 9% against the industry growth of 4.9%. It remains to be seen whether this acquisition can boost shares of the company.

Qualcomm currently carries a Zacks Rank #3 (Hold). Some top-ranked stocks in the same space are Motorola Solutions, Inc. MSI and Ubiquiti Networks, Inc. UBNT, carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Motorola has a long-term earnings growth expectation of 8%. It surpassed estimates in each of the trailing four quarters with an average positive earnings surprise of 12.1%.

Ubiquiti Networks has a long-term earnings growth expectation of 18.6%. It topped estimates thrice in the trailing four quarters with an average positive earnings surprise of 8.9%.

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