The apparent end of trade tensions between the U.S. and China is bringing Qualcomm Inc. (NASDAQ:QCOM) a long-sought bonus, completion of the $44 billion acquisition of NXP Semiconductors NV (NASDAQ:NXPI), the Dutch chip company.
It’s an illustration of just how global and interconnected the world has become that Trump’s backtracking on action against ZTE, the Chinese phone-maker, will apparently result in an American outfit buying a European one. But that’s the way the world is.
The timing of the approval remains uncertain. The Wall Street Journal says it will be done “within days,” Reuters only that Qualcomm and Chinese regulators held “productive talks.” Bloomberg says the quid pro quo — NXP for ZTE — is explicit.
NXP makes chips for security cards and has expanded into processors for previously inert objects like lighting systems and for automotive chips. Qualcomm was down slightly in pre-market trading Tuesday at $59.75 per share.
New Qualcomm Offer
Qualcomm has had a virtual monopoly in many mobile chip markets for years, thanks to its patents on key communication technology, which it has been enforcing rigorously around the world. NXP works in more competitive but fast-growing areas.
Qualcomm stock did not react at once to the NXP news because it doesn’t solve its real problem, Apple Inc. (NASDAQ:AAPL). Qualcomm and Apple are engaged in a messy, global fight over Apple’s demands that Qualcomm cut its royalty rates on iPhone chips, and Qualcomm’s refusal to do so. This has caused Apple to explore other sources of supply, like Intel Corporation. (NASDAQ:INTC).
Qualcomm recently offered what looks like an olive branch, a lower-cost model for licensing its patents for 5G. This deal could also flow into the NXP talks because, in addition to Apple, it is also fighting China’s Huawei on royalty rates.
Right now, handset-makers are feeling forced to license Qualcomm’s full set of patents, for 5% of their costs, but Qualcomm will now allow them to buy only those patents essential to industry standards at a 3.25% rate, with 5G thrown in free. It’s a deal it began offering Chinese companies in 2015, before 5G was on the horizon.
In addition, Qualcomm said it will only enforce patent rights on the first $400 of a phone’s selling price, down from $500 previously. This, too, would mostly impact Apple.
If Apple takes the deal, it would allow Qualcomm to collect billions of dollars in royalty payments that are now being held in escrow. It would also end what I have called CEO Steve Mollenkopf’s “Vietnam,” a pointless conflict that has cost the company billions to no real purpose. In April, Qualcomm cut 1,500 jobs, mostly in its home base of California, to compensate for the losses. Apple is now thoroughly in bed with key Qualcomm competitors, not just Intel but also Samsung Electronics Co Ltd (OTCMKTS:SSNLF), with which it competes directly on phones. Those relationships won’t automatically disappear with the arrival of peace.
The Bottom Line on Qualcomm
The continuing conflicts have taken a toll on analysts, with more now calling Qualcomm a hold than a buy. Its next earnings report, due out July 25, is now expected to show earnings of about $800 million, roughly 58 cents per share, on revenue of $5.2 billion, roughly in line with the March quarter.
But if peace does break out, look for Qualcomm stock to shoot up regardless of earnings. NXP is generally profitable, delivering $2.17 billion in earnings on $9.26 billion of revenue during the last fiscal year. Add that to a return to royalty payments and 5G looming, and it all makes Qualcomm great again.
Dana Blankenhorn is a financial and technology journalist. He is the author of the historical mystery romance The Reluctant Detective Travels in Time, available now at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned no shares in companies mentioned in this story.
