Trade War Puts Qualcomm-NXP Deal’s Fate in Question
Qualcomm (NASDAQ:QCOM), one of the largest American telecom equipment companies, has been trying to settle its $43 billion acquisition of Dutch automotive chip firm NXP Semiconductors (NASDAQ: NXPI) for almost two years. However, pending regulatory approvals have kept investors glued to their screens to monitor the extreme volatility of the stocks.
Qualcomm is one of the industry pioneers when it comes to 3G, 4G and other next-gen wireless tech, and the company has reported strong fundamentals in the recent quarters. However, shares of the tech company have had a rough first half in 2018 as investors evaluate the odds of success for the company’s attempt to diversify into the automotive chip computing segment, which NXP caters to. Here we use TipRanks data to take a closer look at what Wall Street’s top analysts see in store for these two volatile stocks.
In order to get to the term sheet and close the acquisition, approvals from nine countries are required. Eight countries have already given their approval. However, China has been holding tight to its vote, possibly due to the trade-related tensions between Washington and Beijing. President Trump’s administration levied tariffs on $50 billion worth of Chinese imports recently, to which China replied with a tit-for-tat tariff on $50 billion worth of American imports, escalating fears of a global market downturn and concerns around the QCOM deal.
While Qualcomm has set July 25 as the deadline to close the deal, beyond which they will reportedly drop their plans to merge with NXP and pay a $2 billion breakup fee, there still lies the possibility of an extension. The NXP deal is quite essential for Qualcomm’s balance sheet as it aims to diversify into other segments.
“The July 25 ‘walk date’ set by Qualcomm management made sense to us when the company was trying to help China regulators have a clear view of what was a targeted timeline—and before concerns about trade disputes became prominent,” Morgan Stanley analysts said. “As such, we think Qualcomm should revise its ‘walk date’ to be indeterminate, and instead be such time when either China actually blocks the deal or it becomes clear that an active NXPI bid is meaningfully hindering Qualcomm’s long-term opportunities,” they added.
Since the U.S. Department of Commerce banned American companies from selling goods to Chinese telecom major ZTE in April this year, tensions have been on the rise. However, considering the recent lift of the ban, investors are cautiously optimistic about the fate of the QCOM-NXPI deal. Cautiously because despite the more likely outcome of China not rejecting the deal given the approval by other countries, the trade spat has introduced new concerns on the deal’s timeline, with another tariff likely coming up on $200 billion worth of Chinese imports.
Qualcomm is prepared for either outcome. The tech giant has already announced a backup plan of using its nearly $25 billion cash reserves to buy back its shares. It currently floats a consensus rating of Moderate Buy, per the TipRanks analyst consensus. Out of the 12 analysts surveyed in the past 3 months, 6 have a buy rating on the stock while 6 have a hold rating. Moreover, it has a price target of $64.7, indicating a nearly 11.0% upside from current levels. NXP on the other hand currently floats a Moderate Buy rating with a $118.7 price target, indicating a 15.2% upside from current levels.
All considered, it is still tough to speculate on the likely direction the trade talks will take and how the deal will be impacted as a result. However, considering the facts of the case and the fundamentals of Qualcomm, it still appears to be a good bet on the sector. Seeking Alpha blogger Chris Lau states, “Whether or not the deal is completed, Qualcomm’s 16.7x forward P/E suggests the stock is still a value play.” He added, “Qualcomm is a long-term growth play if it partners up with NXP Semiconductors. But if the deal is unfortunately caught up in the tariff trade war between the U.S. and China, Qualcomm and NXP semi will have to forge their separate paths.” See QCOM Price Target & Analyst Rating Details.
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