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Qualcomm Waves White Flag in NXP Semiconductors Deal

Qualcomm has walked away from buying NXP Semiconductors after almost two years, interrupting its plans to expand into new markets like cars and factories. The San Diego, California-based company ended the $44 billion deal after running into regulatory roadblocks in China, which never gave Qualcomm the green light amid growing trade tensions with the United States.

The company has plans for the leftover cash. While it will have to pay NXP $2 billion for terminating the deal, Qualcomm will follow through on $30 billion in stock repurchases to boost its share price, which will take place before the end of next year. Now that the deal has been scrapped, Qualcomm is planning to return more cash to shareholders and cut costs.

Qualcomm started waving the white flag Wednesday while broadcasting third quarter revenue that beat Wall Street estimates. Sales climbed 4.2 percent to $5.6 billion, while profits jumped to $1.22 billion, up from $866 million a year ago. Barring any last-minute announcements from Chinese regulators, Qualcomm said that it would terminate the deal, moving ahead as an independent company.

“The decision for us to move forward without NXP was a difficult one,” said Steve Mollenkopf, Qualcomm’s chief executive, on a conference call with analysts. The company was trying to dispel the uncertainty hanging over the deal. “We weighed that risk against the likelihood of a change in the current geopolitical environment, which we didn’t believe was a high-probability outcome in the near future.”

The deal had long odds during the escalating trade dispute between the Chinese and the Trump administration, which has threatened tariffs to curtail the trade imbalance between the two countries. It raised an array of other complications, including how to combine the sprawling workforces at NXP, the world’s largest maker of car chips, and Qualcomm, the world’s largest smartphone chip supplier.

“Most of the Qualcomm future unknowns were cleared up at the company's earnings disclosure today,” Patrick Moorhead, founder of technology research firm Moor Insights and Strategy, told Electronic Design. “Many investors over the past 18 months have been concerned with unknowns over NXP, future growth opportunities, and its licensing business.”

The deal was terminated more than 20 months after Chinese regulators began to review the deal, which would have reshaped the chip industry. China was the last country suppressing the deal, which Qualcomm had vowed to get approved before the end of last year. In April, the Chinese had still not consented to the deal, driving Qualcomm to impose Wednesday’s deadline.

Ditching the $44 billion deal is the latest setback for Qualcomm. The San Diego, California-based chipmaker has been badly bruised in multibillion-dollar legal battles with Apple, which has refused to pay Qualcomm patent royalties for wireless chips used in its smartphones. Qualcomm said Wednesday that Apple would not use its modems in the next-generation iPhone.

Qualcomm’s woes worsened with Broadcom’s hostile takeover attempt, which was averted after the Trump administration blocked the $117 billion deal on national security grounds. While it was being hounded by Broadcom, the company pointed to the NXP Semiconductors deal to convince shareholders that its current executive team could reap bigger profits in the long run than Broadcom.

The breakdown also deals a blow to the Eindhoven, Netherlands-based NXP. Even though it sells hundreds of millions of microcontrollers and other chips for the growing Internet of Things market, the company faces questions about operating on its own. The company is slowly entering the machine learning space and it has struggled to compete with Nvidia in supplying the robotic brains of cars.

The deal would have given Qualcomm access to chips embedded in everything from cars and factory equipment to thermostats and traffic lights. That the company was willing to pay $44 billion—around $7 billion higher than at first—shows how serious the Internet of Things is to Qualcomm. It also suggests the challenge facing Qualcomm to muscle into the market without NXP.

But under Mollenkopf, who was hired as an electrical engineer more than two decades ago, Qualcomm has won over new customers. Last year, the company sold $3 billion worth of chips used in non-mobile applications, including car dashboards, wearables and security cameras. The company’s backlog of sales to the automotive industry is currently around $5 billion, up $2 billion from January.

Qualcomm is also under pressure to take the lead in 5G technology, which could be installed in smartphones by the first half of next year. The company scarfs down profits by charging manufacturers to use technology based on its wireless patents, taking a percentage of the wholesale price of smartphones or other products. But how that business operates has been under threat by antitrust regulators on three continents.

The company has been fined billions of dollars by regulators and ordered to renegotiate contracts with customers in some countries, including China. But analysts say that the business is holding steady. On Wednesday, Qualcomm said that a major customer disputing its license made a $500 million royalty payment. It also signed licensing deals for 5G technology with Xiaomi and Sharp, among others.

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