China approves Qualcomm-NXP deal

Chinese regulators have approved US semiconductor company Qualcomm’s proposed US$44 billion acquisition of Dutch chip maker NXP Semiconductors. Qualcomm first announced plans to buy NXP 18 months ago.

Background

Qualcomm is an American semiconductor and telecommunications equipment company established in 1985. Based in San Diego, it is known for its investment in research and development. The company gains a significant portion of its profits from patent licensing and chip-making. Qualcomm played an important role in the development of code-division multiple access (CDMA) and mobile technology through the 1990s. It also played a role in the creation of the air interfaces used for 2G and 3G in the United States. Qualcomm holds contracts with the United States Department of Defense, both classified and unclassified. The latter covers topics such as 5G and the Internet of Things.

NXP Semiconductors is a Dutch global semiconductor manufacturer headquartered in Eindhoven, Netherlands. NXP reported revenue of $6.1 billion in 2015, including one month of revenue contribution from recently merged Freescale Semiconductor. The company makes chips for devices used in mobile payment and automotive micro-controllers that are complementary with Qualcomm’s cellular technologies. On October 27, 2016, it was announced that Qualcomm would try to buy NXP.

During trade talks in Beijing last month, US officials reportedly called for China to cut trade deficit by $200 billion. In return, Beijing demanded that the US lift the ban on ZTE, the large Chinese phone company, and called to end its restrictions on US exports of sensitive high-tech products. Shortly after Trump announced that he would reconsider the ban, Chinese regulators restarted their review of US-based Qualcomm’s acquisition of NXP Semiconductors. The $44 billion takeover had been delayed by a lengthy antitrust review. Qualcomm was among the US companies that sold parts to ZTE before the ban. Chinese semiconductor-related stocks fell after Bloomberg News reported the restart of the regulatory review.

Analysis

The decision by China’s Ministry of Commerce (Mofcom) clears a months-long antitrust roadblock caused by trade tensions between the US and Beijing and will allow the takeover to proceed. For the last nine months, antitrust regulators needed to sign off on the merger because of its potential impact on their economies, and after eight others – including the US and Japan – had approved the deal, it continued to await China’s decision.

In April, China suspended the government’s decision on Qualcomm’s NXP acquisition until July 25, citing the need to review the deal on antitrust grounds. In March, the Chinese government had made a sweeping reorganization of three agencies responsible for enforcing different aspects of antitrust laws into a single authority known as the State Administration for Market Regulation (SAMR).

Chinese competitors have expressed concern that the merged company would extend Qualcomm’s patent licensing business into areas like mobile payments and autonomous driving. However, Qualcomm has not yet released the timing of the merger or details of what assets Qualcomm has agreed to shed in order to reach the agreement.

Several months ago, Qualcomm itself was the target meant to be acquired by Singapore-based Broadcom – a deal that, if it had been successful, would have made Broadcom the largest chip maker in the world.

Broadcom withdrew the US$117 billion bid for Qualcomm in March after US President Donald Trump blocked the attempt, saying the merger - which could lead to Broadcom slashing research budgets in Qualcomm - had the potential to cede US leadership in mobile technology to Chinese companies such as Huawei Technology. Read more here.

China’s approval of the NXP acquisition came soon after the US Commerce Department struck a deal with ZTE Corp, saving it from collapsing after it was cut off from its US suppliers for breaching the terms of a sanctions settlement. The decision also comes shortly before Trump announces his decision on whether to impose punitive tariffs on US$50 billion worth of annual Chinese imports.

There are three key issues – Qualcomm’s bid for NXP, the ZTE sanctions, and possible US tariffs on Chinese goods – which have become intertwined. This comes at fractious periods of US-China relations, driven by concerns about a bilateral trade imbalance and Chinese acquisitions of US technology.

Assessment

Our assessment is that tensions between China and the US have escalated after Trump’s national security assessment last year, where he mentioned that China was actively working to undermine US security interests. We believe that US lawmakers are looking to curb acquisitions and alleged theft of advanced American technology, with multiple bills circulating in Congress.

The approval of the merger by Chinese regulators denotes that semiconductors are an area of vulnerability for China. The country spends more on imported silicon for its tech industry than it does on oil. We note that China has taken some pre-emptive steps to develop its own technology. Companies such as Xiaomi, Huawei, and Alibaba have reportedly invested in in-house development.