Qualcomm, the largest maker of smartphone chips, had been fighting for almost two years to close a $44 billion deal that would fundamentally reshape it. In February, it significantly raised its bid for NXP Semiconductors to sway shareholders holding out for sweeter paydays. Less than a month later, Qualcomm disclosed that it was reapplying with Chinese regulators weighing whether to approve the deal.
The status of the deal added to the uncertainties surrounding Qualcomm. Over the last two years, the company rebuffed a hostile takeover bid from Broadcom and stumbled into multibillion-dollar legal fights with Apple. It was also fined billions of dollars from antitrust regulators around the world contending that its licensing practices helped to reinforce its monopoly over 3G and 4G wireless technology.
The San Diego, California-based company cancelled the deal Thursday after Chinese regulators refused to give it the green light. The collapse of the deal amid growing trade tensions between China and the United States significantly slows Qualcomm’s plans to diversify into markets outside its besieged smartphone business. The company needs to balance that shift with its efforts around 5G technology.
NXP, which was founded as Philips Semiconductor in 1953, is also picking up where it left off before the deal’s announcement. Buoyed by the booming markets for chips used in factories and cars, the Eindhoven, Netherlands-based company’s revenues in the latest quarter jumped four percent over the last year to $2.3 billion. Profits, which were also announced on Thursday, were $137 million in the second quarter.
“It is an understatement to say we are all disappointed in the outcome of the regulatory approval process in China,” said Richard Clemmer, NXP’s chief executive officer, on a Thursday conference call with analysts. But he added that the company sees “far more opportunities to excel and lead in our target markets than hurdles which we need to overcome.”
The deal’s disintegration raises questions for both companies, which have almost no overlapping products. Without the 25,000 new customers it would have inherited in the deal, Qualcomm is increasingly under pressure to shift its smartphone chips into new sectors. That will inevitably take longer without NXP, which sells hundreds of millions of microcontrollers and applications processors every year for everything from cars to the factories that make them.
The challenge for NXP is adapting to fundamental changes in its traditional markets. The company's customers and customers’ customers in the automotive sector are preparing to build cars that drive themselves and increasingly look like corporate servers under the hood. And the company has been slower to start machine learning development than competitors ranging from Intel to Nvidia and Renesas to ST Microelectronics.
Still, it is hard to bet against the world’s largest supplier of automotive chips. NXP's sales to the car manufacturers jumped seven percent annually to $1.01 billion in the second quarter despite being dampened by discrete component shortages. The business could grow faster in the future as the company increasingly plays the role of consultant with customers, selling system solutions packaged with many different kinds of chips.
“One of the most encouraging trends we have seen in our automotive business has been the increasing cross selling of the entire portfolio,” Clemmer said, adding that its automotive revenue was a record high in the latest quarter. “Our engagement with customers has elevated to a more consultative level, in which we propose complete solutions that leverage products from across our entire portfolio.”
But new rivals in the automotive sector are threatening to marginalize it. Nvidia and Mobileye are leading the increasingly important market for chips powering prototype autonomous cars, identifying obstacles and plotting the vehicle’s path on highways. Meanwhile, NXP has focused on chips used in radar and infotainment systems. The company’s latest microcontroller can automatically accelerate, steer and brake cars while preserving functional safety.
Car manufacturers will pay more for these less sophisticated chips per vehicle than on autonomous driving chips, Clemmer said. “I think that as we think about the high-end processing associated with the automotive market, we clearly are going to have to look at some partnerships to be able to drive a more complete solution for our customers since we don’t have the capability,” he said, adding that he would not rule out partnering with Qualcomm.
Other businesses are blossoming. NXP’s secure connected devices division earned $644 million of revenue, compared to $588 million in last year’s second quarter. The company plans to start leveraging scalable machine learning accelerators next year. That would allow everything from factory sensors to surveillance cameras to run image recognition and other simple tasks without being connected to the cloud.
And yet other businesses have stumbled. Security interfaces and infrastructure sales fell from $438 million to $398 million over the last year after Chinese telecommunications equipment maker ZTE was banned by the U.S. Commerce Department from buying American parts. That put the company's device manufacturing on hold, hurting sales of NXP's radio frequency chips. Now that the ban has been lifted after urging from President Donald Trump, NXP plans to start to recovering that business.
Questions have also been raised about the commitment of NXP’s management team. Last year, former chief financial officer Daniel Durn left for the same role at Applied Materials. Clemmer, who has been chief executive for nearly a decade, sold around $400 million of his shares in the company last year. He stressed on Thursday that the current management team, himself included, was “fully committed” to the company.
NXP is trying to refocus on its business going forward. Kelly said on the conference call that “clearly the regulatory process has proven to be quite a challenge.” He added that “small acquisitions that provide some unique product technology or allow us to provide a more complete solution to our customers are within reason but I don’t think that you will see us trying to do any huge transactions.”
Both companies are returning the leftovers from the deal to shareholders. NXP said on Thursday that it had received Qualcomm’s $2 billion termination fee and would combine it with stockpiled cash to repurchase $5 billion worth of shares. Qualcomm plans to buy back $30 billion of shares before the end of next year, which it vowed to shareholders in case the acquisition fell through.
Under chief executive Steve Mollenkopf, Qualcomm has shown signs of diversifying. Last year, the company sold $3 billion worth of chips used in applications outside smartphones, including wearables, drones, security cameras and dashboard displays in cars. The company’s backlog of sales to the automotive industry is currently around $5 billion, up $2 billion over the last seven months alone.
NXP, holding its first quarterly financial call in more than 20 months, projected third quarter revenue in the range of $2.25 to $2.5 billion. Clemmer said that he believed the company could grow around six percent every year for the next three years as the company and its employees as get over “deal fatigue.” NXP only completed its integration of Freescale Semiconductor in the last quarter.