As deadline looms, US-China trade war leaves fate of Qualcomm-NXP merger hanging

Sources say recent activity by Beijing indicates a positive turn for the deal, which awaits only Chinese government approval, but uncertainty remains

PUBLISHED : Tuesday, 24 July, 2018, 1:27am
UPDATED : Wednesday, 25 July, 2018, 5:46am

US chip maker Qualcomm’s long-delayed purchase of NXP Semiconductors is a US$44 billion question caught in the throes of an increasingly tense US-China trade battle.

The pursuit of the Dutch chip maker started in October 2016, and a major deadline to solidify the deal looms on Wednesday.

Qualcomm’s purchase of NXP is considered strategic as the US progresses on 5G, the next stage of technology that China is racing to dominate. Nearly 21 months later, Beijing remains the only obstacle for the deal to be finalised.

The Chinese government still hasn’t approved the merger despite it clearing the thorny antitrust hurdle last month. Eight of the nine countries – including the US and Japan – where Qualcomm does business have signed off on the deal.

The most rational thing for the Chinese government to do is to approve. But not everything is rational right now
Stacy Rasgon, investment analyst

“The deal is hung up in broader issues, that’s clear. What’s unclear is what is going to happen,” said Stacy Rasgon, a semiconductor analyst at the investment firm AllianceBernstein. “The most rational thing for the Chinese government to do is to approve. But not everything is rational right now.”

As the expiration date quickly approaches, the picture remains murky as Chinese government continues to be tight-lipped. But recent activity indicates a positive turn for the deal, according to multiple people that are familiar with the matter.

The Ministry of Industry and Information Technology of China (MIIT) has become more favourable toward the purchase, said the sources, who asked not to be named because the discussions are private.

The ministry has been reviewing the merger for its impact on the Chinese technology industry after the State Administration for Market Regulation cleared the antitrust issue last month.

The Ministry of Industry and Information Technology did not immediately respond to a faxed request for information about the status of the deal. Representatives from Qualcomm and NXP did not respond to emails seeking comment.

Concerns over US-China trade conflict loom large at Asia’s largest hi-tech conference

After the antitrust hurdle was cleared, the deal was further complicated when US President Donald Trump started battling Beijing on trade issues, denouncing China for taking advantage of the US and imposing unexpected tariffs.

Beijing held up the deal, hoping it would bolster its bargaining power, the sources said.

Shares of NXP are down about 16 per cent to US$100.66 since mid-June, moving further from Qualcomm’s offer price of US$127.50. The bigger the gap between the offer price and the trading level, the less confident investors are that the deal will succeed.

Beijing has figured out that American companies cannot expect a sympathetic ear from the White House
Beijing-based research firm Gavekal Fathom China

MIIT’s recent movement signals that Beijing no longer believes that holding American companies hostage is an effective way to pressure Trump on tariffs.

The China-based research firm Gavekal Fathom China said in a report that the head of the China Mobile Phone Alliance, Wang Yanhui, wrote on Saturday that he thought Beijing would approve the deal, calling it “a high probability event”.

A separate report by the research firm said that “Beijing has figured out that American companies cannot expect a sympathetic ear from the White House” over the effects of punitive tariffs. “Beijing’s incentives are to make foreign companies welcome.”

Qualcomm, which is on the hook for a US$2 billion break-up fee if the deal is not approved by Wednesday, has long since stopped feeling welcomed by Beijing. Its executives have said recently that the company would walk away if Beijing does not sign off by the deadline.

While this can be construed as a negotiating tactic, Qualcomm also faces pressure from its shareholders to figure out the best way to use its cash as opposed to wait endlessly.

Days from the expiration date, many are looking at another Chinese telecommunications company, ZTE, for clues.

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In April, the US Commerce Department banned the company from buying American components for seven years after it violated US business laws and then lied about it, causing ZTE to shut down most its operations.

In June, Trump asked the Commerce Department to get ZTE back in business, saying that saving the crippled company was part of a broader negotiating strategy with China. Many believed the Qualcomm deal was part of a package.

The ban was lifted this month, and ZTE was allowed to resume its purchase of American components.

On Friday, Congress backed down on its efforts to reinstate the ban, likely removing the last threat that may have kept Beijing from approving the Qualcomm deal, the sources said.

The waiting game and the uncertainty have frustrated investors, Rasgon said. “Either way, a clear profile for next steps will be needed however things go,” he said.

ZTE allowed to resume business as US temporarily lifts ban

Qualcomm shares are down about 2 per cent from when it initially offered to buy NXP. The company is scheduled to report its quarterly earnings on Wednesday after the markets close.

“Given everything that’s going on, anything is possible,” Rasgon said. “When I realise I have to wake up in the morning trying to predict the president’s tweets, what can you do to predict the outcome of the deal?”

Additional reporting by Sarah Dai

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