In April, Qualcomm (NASDAQ:QCOM) was all but ready to finalize its long-pending, $43 billion acquisition of NXP Semiconductors (NASDAQ:NXPI) when China put down its foot. Its Ministry of Commerce (MOFCOM) insisted on having more time to review the deal, so the transaction deadline was pushed back to July 25. Now, that day is almost here, the mobile tech powerhouse patiently awaits the ruling that will determine its next move.
RBC Capital’s analyst Amit Daryanani chose to step up to the prediction plate, reviewing all possible actions MOFCOM could take, as well as their corresponding outcomes. Daryanani suggests there are three potential moves that could be made; first, and most simply, MOFCOM could approve the acquisition by July 25. However, if the deal is left pending after the 25th, Qualcomm could also once again extend the transaction deadline. Lastly, QCOM could forget the deal altogether and administer a stock buyback program. Each option has option has plus- and downside, but Daryanani certainly favors some over others.
If it were up to the firm, Qualcomm would’ve sealed this deal months ago. As the case remains unsettled, the company would be very content in getting China’s approval and bringing the acquisition to fruition at last. The analyst supports MOFCOM’s approval, option 1, for several reasons, maintaining that it’s an “attractive way to play secular semiconductor content growth in automotive and offers a platform for autonomous vehicle-centric solutions.” Additionally, Daryanani reiterates that NXPI could provide the upgrades in near field communication (NFC) and microcontroller diversity to skyrocket QCOM’s position in the tech market. Confident in EPS growth, the analyst predicts this transaction would make Qualcomm about 30%-40% accretive. By and large, this choice would put the mobile tech leader in a stable position for the future—especially compared to an extension of the July 25 deadline.
Knowing MOFCOM and the ongoing U.S./China “trade wars,” it would not be a surprise if China leaves the deal pending come decision day. If this scenario pans out, Qualcomm could still try to move forward with the acquisition by extending the deadline another three months. However, even if this is the case, MOFCOM would likely approve the deal in October if at all, so Daryanani expects a notable drop in future EPS accretion. Though this option would not be as beneficial to QCOM, it would still give the company the NFC and microcontroller assets to establish a better position in the Internet of Things (IoT).
Both scenarios 1 and 2 involve Qualcomm investing big in NPX, absorbing it, and reaping the benefits it has to offer. However, option 3 does not, which is the exact reason why it is Daryanani’s favorite. This scenario entails QCOM terminating the deal altogether and going forward with a stock buyback program. Qualcomm previously stated that a program would be about $20-$30 billion so, assuming the firm repurchases $25 billion at an estimated $64 per share, it will be capable of reducing its share count by nearly 400 million. Though this move would involve QCOM paying NXPI a $2 billion compensation fee, it requires significantly less capital commitment and still implies the same EPS accretion as option 1 (30%-40%).
Which path the company will go down is a mystery, but Daryanani is confident everything will work out fine for Qualcomm.
As such, Daryanani maintains an outperform rating on Qualcomm stock with a $70 price target. Investors who listened to Daryanani over the past year have made 32% by following his bets, according to TipRanks. The analyst also holds a 79% success rate and is ranked #32 out of 4,842 analysts.