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Why Did NXP Agree to Merge with Qualcomm?

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Why did Qualcomm and NXP decide to merge?

In the previous part of the series, we saw that NXP Semiconductors (NXPI) and Qualcomm (QCOM) were looking to be at the center of the connected world. One’s strength complements the other’s weakness and provides a strong growth opportunity in the long term.

In October 2016, NXP agreed to merge with Qualcomm for a consideration of $47 billion. The merger is expected to be completed by the end of 2017. What encouraged Qualcomm to undertake the semiconductor industry’s biggest merger of all time?

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QCOM-NXP merger brings strong growth opportunities 

According to Strategy Analytics, Qualcomm’s share in the smartphone application processor market fell from 52% in 2014 to 42% in 2015 due to strong competition from MediaTek. The overall smartphone market could represent a total addressable opportunity of $100 billion by 2020. By merging with NXP, Qualcomm is buying into the future.

NXP would make Qualcomm a leader in the automotive electronics, secure payments and identification, IoT, and networking spaces. While the smartphone market is slowing, the automotive semiconductor market is growing faster than the automotive market as content per car is rising. This growth could increase Qualcomm’s total addressable market to $138 billion by 2020. Future macroeconomic trends in energy efficiency, security, and connected mobile devices could drive the combined company’s long-term growth.

How would the combined company look like?

The combined company would become the world’s largest integrated semiconductor solutions provider and the third-largest semiconductor company after Intel (INTC) and Samsung (SSNLF). Qualcomm’s broad portfolio of embedded products would have no direct competition. Infineon would be a close competitor in the automotive space.

An NXP merger would be accretive to Qualcomm’s earnings. NXP would increase Qualcomm’s annual revenue 40% to $35 billion. This would be the fastest revenue growth for NXP, with its revenue rising from $6.1 billion in 2015 to $10 billion in 2016 to ~$35 billion in 2018.

Nomura analyst Romit Shah expects Qualcomm’s integration of NXP to increase its earnings 30% in 2018. However, the merger has to be successfully implemented for the above benefits to materialize. If there are any inefficiencies or delays in integration, it could give NXP’s rival Infineon an opportunity. We’ll look into this in the next part of the series.

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