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Qualcomm (NASDAQ: QCOM) is on track to acquire fellow chip maker NXP Semiconductors (NASDAQ: NXPI) by the end of 2017. It's a game-changing deal that adds both scale and brand new markets to Qualcomm's portfolio. This week, Qualcomm tapped the gas pedal with a tender offer for NXP shares. Business as usual, or an early start?
Let's have a look.
What's going on?
The NXP acquisition is expected to close by the end of 2017, pending approval by shareholders and regulatory bodies. Qualcomm is offering a straight-up $110 in cash for each NXP share, financed by tapping into the company's large cash reserves (often found in low-tax districts overseas) and new debt. None of this has changed.
On Friday, the company announced the start of its official tender offer program, giving NXP shareholders the option to cash in their share stubs for $110 each -- no need to wait for those tricky deal approvals. The offer is officially run by a Dutch Qualcomm subsidiary, which makes sense because NXP is headquartered in Eindhoven, Netherlands.
NXP's board of directors officially recommends investors to take advantage of this tender offer. The deal-within-a-deal expires on Feb. 6 and is not contingent on any financing conditions.
If every NXP shareholder takes Qualcomm up on this offer, the deal would close very quickly. Qualcomm would need to come up with at least $27 billion of liquid cash in a hurry, which would be tricky because the company only has about $6 billion of cash equivalents on hand right now. Add in $13.7 billion of long-term investments and $12.7 billion in short-term investments, and Qualcomm gets close to meeting the cash needs of this deal.
But it takes some time to break short-term investments down into real cash, and the long-term papers are even slower to convert. And on this scale, I would expect most of Qualcomm's investments to be saddled with penalties for cashing out early.
Moreover, the company is still working out its debt details, and I haven't seen any announcements in that area yet.
In short, Qualcomm is not ready to settle the costs of its NXP deal quite yet.
What's going on, then?
This is actually business as usual.
As much as Qualcomm would love to close the NXP deal early, it isn't likely to happen.
According to SEC filings, Qualcomm will only actually pay for NXP shares if a battery of conditions have been met by the close of business, Feb. 6.
For example, the Hart-Scott-Rodino antitrust waiting period must have been completed or waived by then, along with similar regulations in the European theater. In fact, all the usual regulatory hurdles must have been cleared before Qualcomm can make good on this promise.
Moreover, the tender offer must have been accepted by a large majority of NXP's shareholders, raning from 70% to 95% depending on another set of detailed sub-conditions.
In other words, the companies must be ready to proceed in a very official sense, and a solid majority of NXP's shareholders have to be ready to vote with their wallets.
The regulatory wheels might not turn quite that quickly, and a few too many NXP owners could be dragging their feet. If so, Qualcomm isn't spending a penny on NXP shares under this offer but will most likely post another tender offer with very similar terms right away.
If all the other ducks are lining up correctly by the end of January, I'm sure Qualcomm could accelerate its talks with prospective lenders and close the deal early. Checks would be in the mail no later than 10 business days after the successful deal's expiration, which works out to Feb. 21.
But the chances of actually getting there in time are not huge.
Image source: Getty Images.
This happens all the time, folks
For example, let's look at Nokia (NYSE: NOK) and its $17 billion buyout of Alcatel-Lucent.
Announced in the spring of 2015 and expected to close in the first half of 2016, this acquisition did not happen overnight. The first tender offer was filed in August 2015, with an expiration date set to Dec. 23 of that year. That was several months ahead of the expected closing schedule, much like Qualcomm's early filing and expiration.
But that tender offer expired and was replaced. This past January, Nokia gained control of 80% of Alcatel-Lucent's shares, effectivly ending the quest for a controlling stake in the target company. Buuuuut that was not all. Nokia still only owned 91% of Alcatel-Lucent in early February, which still left the Finnish company far short of the 95% threshold that could force the remaining Alcatel-Lucent owners to let go of their shares.
Another tender offer followed, expiring on Oct. 31 with at least 95% Nokia ownership of all Alcatel-Lucent stock classes and bond portfolios. That triggered the final squeeze-out, and Nokia owns the entirety of Alcatel-Lucent as of Nov. 2.
What happens now?
The Qualcomm-NXP combination will probably work out a lot like Nokia's big buyout.
The final "i" should still be dotted in the second half of 2017, pending those crucial regulatory approvals. At this point, Qualcomm is largely getting a feel for the level of shareholder support it can expect. Remember, nobody gets paid unless everybody gets paid, so you can't simply cash in your chips for a $110 payout and 11% gains in a much shorter timeframe. All the usual hurdles must still be cleared ahead of time, and a dominant majority of NXP shareholder must agree that it's the right thing to do.
In short, nothing much has changed here. Feel free to enter your NXP shares into the tender offer and hope for the best, but don't hold your breath waiting for a large Qualcomm check.
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