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US-China Trade Tensions Put Qualcomm-NXP Deal at Risk

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What if China retaliates?

Qualcomm (QCOM) has been losing business to its competitors even before fears of a US-China (MCHI) trade war began. The United States has taken action against China’s ZTE, and China’s MOFCOM (Ministry of Commerce) is keeping an eye on the ZTE case with the possibility of retaliation to protect its companies.

The United States is also protecting its companies. In March, President Donald Trump rejected Qualcomm’s takeover by Singapore-based Broadcom (AVGO) over fears that the deal would eliminate Qualcomm, the only chance the United States has to lead the 5G (fifth-generation) space. The Hill reported that Adam Segal, an expert on emerging technologies and national security at the Council on Foreign Relations, warned that if the United States frequently uses presidents’ executive orders to block deals on the grounds of national security, it could encourage other countries to do the same.

Qualcomm can’t afford to have tense relations with China since it’s seeking regulatory approval to proceed with the NXP Semiconductor (NXPI) takeover.

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Qualcomm-NXP deal

Qualcomm has been looking to acquire NXP since October 2016. After 16 months of tendering shares and revising its offer from $110 per share to $127.50 per share, it finally got NXP shareholders’ consent. Qualcomm has secured approval from eight of the nine regulators, and only China’s MOFCOM’s approval is pending.

Qualcomm has been trying to accelerate the deal by assuring MOFCOM that the deal won’t include any licensing fee for NXP customers in the future. NXP even lowered its exposure to China by selling a 40% stake in the Suzhou ASEN Semiconductors joint venture to Taiwanese partner Advanced Semiconductor Engineering. But none of those efforts seem to be working.

The NXP deal is important in order for Qualcomm to reduce its dependence on the smartphone market where its licensing business is losing money on litigations and regulatory fines. Qualcomm needs NXP in order to diversify into the fast-growing automotive and IoT (Internet of Things) markets. However, growing tensions between the United States and China have made China reluctant to approve the deal.

The fate of the Qualcomm-NXP deal is in the hands of China

Qualcomm has withdrawn and refiled its antitrust application for the NXP deal on the request of China’s MOFCOM, giving the regulator another six months to review and approve the deal. That extended the end date of the NXP deal from April 25 to July 25.

Some analysts believe that China won’t approve the deal before trade tensions with the United States ease. However, a TechCrunch article reported that China may have to approve the Qualcomm-NXP deal despite tensions in order to show the world that its economy is conducive to do business, especially when its trade practices are being questioned. China has been attracting foreign technology companies to set up their manufacturing plants in the country.

Next, we’ll look at the challenges Qualcomm is facing in the United States.

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