Trouble with the Qualcomm NXP Merger
If you’re in business, the most dangerous combination in the world is President Donald Trump and China. Unfortunately, that’s exactly what QUALCOMM, Inc. (NASDAQ:QCOM) finds itself facing, much to the chagrin of QCOM stockholders who worry about the pending Qualcomm NXP merger.
The timing couldn’t be worse.
Qualcomm’s bid to acquire NXP Semiconductors NV (NASDAQ:NXPI) finally caught a break last week, after months and months of inaction. Rumors were trickling out of China, saying that regulators might consider letting the deal move forward.
The effect: The QCOM stock price started to trend upward (at long last!), gaining more than nine percent in a handful of trading sessions. Then, all of a sudden, U.S.–China relations took a turn for the worse.
This wasn’t a coincidence. It wasn’t bad luck. It was a deliberate threat made by the Chinese government in retaliation for the U.S. government’s treatment of ZTE Corporation (HKG:0763).
Confused? Don’t worry. Geopolitics is a mind-numbing web of money and power, so let me try to untangle it for you.
Some folks in the White House decided to make ZTE—a Chinese phone maker that often buys parts from U.S. companies—a political football during trade negotiations with China. They banned ZTE from dealing with U.S. suppliers for a period of seven years.
China responded in kind. I have no idea why, but its anger was directed toward the $44.0-billion Qualcomm NXP merger.
The market understood exactly what was happening. Everyone knew China’s Ministry of Commerce was saying, “Nice merger you have there…it’d be a shame if something happened to it…”
But here’s the twist: Neither Qualcomm nor NXP is based in China.
Qualcomm is American; NXP is Dutch. So how is it possible that China can block a merger of two foreign entities? Simple: These firms operate in nine different countries, therefore regulatory bodies in all nine jurisdictions must approve the merger.
Eight already have—China is the exception.
The Merger and Qualcomm Stock
The Qualcomm NXP merger has been stuck in limbo for two years. I remember when the deal was announced in 2016. Semiconductor acquisitions were dime a dozen, so I wasn’t surprised to hear about another deal valued in the tens of billions.
But then six months went by. And another six months. And another six months. Eventually, investors got tired and skeptical, which meant their outlook on Qualcomm stock became bearish. Unsurprisingly, the stock took a nosedive.
Chart courtesy of StockCharts.com
Over the next two years, the QCOM stock price mirrored the state of U.S.–China relations.
You can see that reflection clearly. Whenever President Trump sat down at the negotiating table, investors turned bullish on Qualcomm stock; when he flipped over the table and threatened a trade war, the opposite happened.
Until this acquisition is resolved, investors are going to steer clear of QCOM stock.
But maybe they shouldn’t…
Maybe, maybe, this slump is an opportunity.
After all, Chinese and American trade negotiators are scheduled to meet at next month’s North Korea Summit. They could use the fervor of peace talks to hammer out a deal, which would then free up Qualcomm to complete its acquisition.
All that’s needed is for China (and the White House!) to stop using the $44.0-billion Qualcomm NXP merger as a political bargaining chip.
Not only would this allow Qualcomm to absorb its biggest competitor for mobile chips, but it would distract from the messy lawsuit against Apple Inc. (NASDAQ:AAPL). That lawsuit is a huge drag on the share price.
To be clear, I’m not saying that the Qualcomm NXP merger will make those troubles disappear. But absorbing NXP could help Qualcomm trim its burgeoning cost base and, by extension, increase its profit margin.
My view is that QCOM stock is on the verge of a breakout. It is trading halfway between its 52-week average, during a period of improving political conditions, making me think there’s tremendous upside left untapped.