NXPI NXP Semiconductors NV

By Don Clark and Tim Higgins 

Qualcomm Inc.'s agreement to pay $39 billion for the world's largest developer of chips for automobiles represents a huge bet on cars becoming the next smartphone -- a way to roll together communications and services once handled by dozens of other devices.

San Diego-based Qualcomm isn't the first tech company to eye the automotive industry for expansion, and the jury is still out on whether the deal will help make cars smarter and safer. But it shows the degree to which interest in turning cars into digital-technology showcases have cast a gold rush-like spell over chip-makers, software developers and venture-backed startups.

Its deal for NXP Semiconductors NV, the biggest to date in the semiconductor industry, puts the spotlight on Qualcomm Chief Executive Steve Mollenkopf, who 20 years ago started at the company he now runs designing the unseen chips used in mobile phones.

A low-key manager who associates said isn't prone to making brash statements and listens more than he talks, Mr. Mollenkopf, 47 years old, relishes the deal's ability to broaden Qualcomm's chip portfolio -- and industrial horizons.

"This feels like the type of ambition that is Qualcomm," Mr. Mollenkopf said in an interview on Thursday.

Qualcomm, unlike NXP, leaves chip manufacturing to others. Mr. Mollenkopf noted his company has been learning more about manufacturing issues through a wireless-component joint venture with Japan's TDK Corp.

Thursday's deal values NXP at $110 a share, which represents a 34% premium over where NXP shares traded before The Wall Street Journal reported on the talks Sept. 29. Including debt, the deal is worth $47 billion.

NXP's position in the fast-growing automotive-chip market was a key motivation for the deal, as cars gain a variety of driver-assistance features and ultimately begin to drive themselves.

Qualcomm already supplies the chips that bring cellular connections to cars. It views NXP's chips and its sales connections with auto makers and their major suppliers as a way to penetrate that business much more quickly, said Mr. Mollenkopf.

"Our ability to sell to them expands just incredibly dramatically as a result of the deal," he said. More broadly, NXP would help Qualcomm become a much bigger player in a trend called the Internet of Things -- Silicon Valley shorthand for adding sensors, computing and communications to everything from home appliances to office machines and farm tractors. NXP chips called microcontrollers are widely used in many such applications.

NXP also has a leading position in chips for near-field communications, a short-range wireless technology used for applications such as completing payments on smartphones and unlocking car doors.

Qualcomm derives most of its revenue from designing and selling chips, but it earns more than half of its profits from licensing its wireless patents to nearly all makers of mobile phones. It had reasons to diversify beyond its processors and wireless chips for smartphones, a business that has reached a plateau.

The hurdles are several: NXP has about 44,000 employees, according to public filings, many more than the 30,000 Qualcomm disclosed last year in its most recent annual report. NXP also owns seven factories in five countries that turn silicon wafers into chips.

In addition, analysts say, NXP has older factories that wouldn't be easily adapted to make Qualcomm's chips. The company inherited operations that began more than 60 years ago as part of the Dutch giant Philips NV and Motorola Inc., which spun off its chip business to create Freescale.

Mr. Mollenkopf said he expects veteran NXP executives to help run the manufacturing operations and points to its successful integration of other operations. "We get a lot of expertise coming in," he said.

Qualcomm said it expects the purchase to add significantly to its adjusted earnings. The company projects generating $500 million of annualized run-rate cost synergies within two years after the transaction closes.

The company will use offshore cash and new debt to finance the deal, noting that the transaction structure "allows tax-efficient use of offshore cash flow and enables Qualcomm to reduce leverage rapidly."

On Wednesday, NXP reported third-quarter profit of $91 million, or 26 cents a share, down from $361 million, or $1.49 a share, in the year-ago quarter. However, the Dutch company pointed to its operating income, excluding certain items, which rose to $691 million from $449 million.

Revenue surged 62% to $2.47 billion, in line with the company's projections. However, excluding revenue from Freescale and other adjustments, NXP said, revenue would have been down about 3%.

Qualcomm has yet to report its results for the fourth quarter ended in September. For the June quarter, Qualcomm reported a profit of $1.4 billion, or 97 cents a share, up from $1.2 billion, or 73 cents a share, a year earlier. Revenue increased 4% to $6 billion.

The agreement is the latest in a string of mergers and acquisitions in the semiconductor industry, which has seen more than $200 billion in deals since the beginning of 2015. The deals come as sales growth has faded at many of the once-burgeoning companies as big chip markets -- such as those for smartphones and personal computers -- have ebbed.

The deal is the largest in Qualcomm's history and comes after activist investor Jana Partners LLC exited its investment in the company earlier this year. Last year, Jana pressed the company to consider splitting its chip unit from its patent business. Qualcomm evaluated a split but ultimately decided against it.

Qualcomm pioneered what the semiconductor industry calls the "fabless" model. That avoids the cost of operating and building advanced fabs, which can cost more than $10 billion each for facilities that can create the most advanced chips.

Industry executives say running factories requires a different set of management skills than designing chips. Those include tracking the age and performance of manufacturing equipment, overseeing a supply chain of materials and managing production workers, who are represented by labor unions in some NXP locations.

--George Stahl, Eyk Henning, Maria Armental and Dana Cimilluca contributed to this article.

Write to Don Clark at don.clark@wsj.com and Tim Higgins at Tim.Higgins@WSJ.com

(END) Dow Jones Newswires

October 27, 2016 18:52 ET (22:52 GMT)

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