The now-scrapped acquisition of NXP Semiconductors NV (NXPI) by Qualcomm Inc. (QCOM) was problematic throughout that whole process, ranging from having to raise its offer to $44 billion from the original $30-plus billion to endless global regulatory approval and objection, not to mention the underlying merit of bidding for NXP’s automotive chip technology, something not beyond Qualcomm’s own research capability. Citing the difficulty of obtaining the Chinese government’s endorsement, Qualcomm eventually decided not to acquire NXP. Instead, it’s reallocating $30 billion for share buybacks. There may well be other unstated reasons for not buying NXP. But in any event, Qualcomm is $14 billion better off NXP, having abandoned the $44 billion NXP acquisition.
Buying NXP: Quick Solution at Steep Premium
We objected to the proposed NXP acquisition when it was first announced about two years ago, arguing that Qualcomm should develop its connected-vehicle offerings in-house, given how it pioneered the broader wireless communications technology, which future “internet of things” (IoT) applications, including connected cars, seemingly all have to piggyback on. In addition, buying NXP for its in-car platforms also meant assuming the company’s chip manufacturing operations, which could be a distraction for Qualcomm as a fabless semiconductor company, focusing on invention and design but not the nitty-gritty chip making.
From a more strategic perspective, Qualcomm shouldn’t put all its capital into this single basket of connected-car initiative, given ongoing developments of potentially viable markets for a broad range of IoT applications, including connected machines and appliances, home automation, intelligent buildings, smart energy and so on. It’s true that Qualcomm could spare $30 billion cash for acquisitions without taking resources away from what’s normally used for research and development (R&D). But to pay for the full price tag of $44 billion, debt would have to be used to cover the other $14 billion, when Qualcomm already had about $10 billion in long-term debt at the time.
Investing in Own Research: Back to Roots
Qualcomm at its core is a wireless communications technology research company with a vast body of patent work, which it commercializes through licensing. Qualcomm has always grown out of inventions with the help of small acquisitions of certain complementary technologies. That is probably why the Broadcom acquisition of Qualcomm never had a good optics. They don’t mirror each other in what they are really about. Broadcom’s attempt would have failed one way or the other even without the government intervention. But Qualcomm is still at risk of becoming a target for both strategic competitors and financial buyers, unless management can clean up its ongoing licensing disputes and come up with a serious diversification strategy post-mobile and into the age of IoT.
Qualcomm’s annual spending on R&D is respectable, compared to many others, about 20% to 25% of total sales between 2013 and 2017. But an annual increase of R&D spending of only 1% is then again not that spectacular. R&D spending was $5.5 billion in 2017, while cash holding at the beginning of the year was $6 billion, further aided by operating cash flow of $4.7 billion during 2017. It’s financially possible for Qualcomm to spend more on R&D, especially given that capital expenditures averaged only $891 million from 2013 to 2017. In fact, Qualcomm was cash rich at the end of 2017 with about additional $24 billion from an one-time investment sale. However, all that extra cash now goes to share buybacks, boosting the stock in the short term, but probably at the expense of long-term value creation, which depends on more R&D spending.
If past is any indication, the benefit Qualcomm has enjoyed from the mobile explosion should repeat itself in the upcoming IoT developments, assuming Qualcomm can once again lay the right research foundation. Market trading data show that Qualcomm stock has performed exceptionally well since its IPO in December 1991 at $16 a share. Based on the stock’s closing price of $70.59 on September 6, 2018 and its four splits: 2 for 1, 2 for 1, 4 for 1 and 2 for 1 (in the order of when the split was initiated), the number of shares after accounting for all the splits would have been 32 for each share originally owned, and the stock price, had the stock not been split, would have been $2,258.88 ($70.59 x 32), a whooping increase by 141.18 times ($2,258.88/$16) over about 28 years or a return of more than 500% annually on average. It’s a perspective hard not to keep in mind, when considering to invest in Qualcomm for the future.