Activist Investor Pushes Qualcomm to Up Its $38B NXP Bid

Hedge fund Elliott Management has a 6 percent stake in NXP and calls the semiconductor maker's shares significantly undervalued.

Qualcomm

Qualcomm’s already hefty bid to buy rival NXP Semiconductor for about $38 billion could become more expensive now that active investor Elliot Management has entered the picture.

Officials with Elliott have disclosed that the hedge fund now has a stake of between $2.2 billion and $2.3 billion in NXP, making Elliott the company’s largest shareholder with about 6 percent of the stock. In a regulatory filing, Elliott officials said they believed NXP’s shares are highly undervalued and suggested it would put forth proposals regarding the company’s operations and transaction strategies that could lead to pushing Qualcomm to up its bid, which already is the highest such deal in an active semiconductor market.

After weeks of speculation, Qualcomm executives in October 2016 announced its intention to buy NXP in an effort to expand the reach of its silicon products beyond the mobile device market—in particular smartphones and tablets—and into emerging markets such as the internet of things (IoT) and autonomous vehicles, putting it in even closer competition with chip giant Intel.

Up to 80 percent of NXP shareholders must agree to the deal for Qualcomm’s purchase to go forward. The deadline for shareholders to agree to tender their shares has been pushed into the future several times as the companies seek regulatory approvals for the deal in the United States and overseas. It’s been a difficult path, with European regulators in June suspending an investigation into the deal, which has put another delay in Qualcomm’s plans. The chip maker still expects to close the deal by the end of the year.

The introduction of Elliott into the mix won’t make the process any easier. The hedge fund over the past several years has garnered a reputation within the tech industry of buying large shares of major vendors and then pushing for changes in operations and management in an effort to get more money returned to investors.

The companies that Elliott has targeted over the last few years include data storage giant EMC (which subsequently was bought by Dell in the largest acquisition in tech industry history), unified communications (UC) vendor ShoreTel (which is being bought by rival Mitel, another target of Elliott, as  two years ago it encouraged a merger between Mitel and Polycom that never materialized), Citrix Systems, Juniper Network and Riverbed Technology.

The latest wrinkle in the push for NXP is just the most recent challenge for Qualcomm, whose ARM-based systems-on-a-chip (SoCs) can be found in most mobile devices like smartphones and tablets.

The company’s unique business model—it has two businesses, one that makes the chips and another that licenses the chip maker’s patents—has been under fire from regulators in the United States and elsewhere. In 2014, the company agreed to pay $975 million to end a lengthy antitrust issue in China, and in January the U.S. Federal Trade Commission (FTC) filed an antitrust lawsuit against Qualcomm related to its licensing business.

Qualcomm also is in an escalating legal dispute with Apple, which for years had only used Qualcomm’s cellular modems in its popular iPhones. However, Apple last year began using Intel modems in some versions of the iPhone 7 (the other versions used Qualcomm modems, which are used to help smartphones and other mobile devices connect to wireless networks).

Apple in January filed suit against Qualcomm, saying that the chip maker is unfairly demanding the device maker to pay for innovations that Qualcomm had no role in. Apple has pressured contract manufacturers not to pay licensing fees to Qualcomm until the legal dispute is resolved.

Qualcomm has shot back, accusing Apple of infringing on Qualcomm patents in its devices and asking the federal International Trade Commission (ITC) to ban the import of iPhones and other Apple systems that infringe on the multiple patents. That has drawn the ire of such parties as Intel and the Computer and Communications Industry Association (CCIA), both of which accused Qualcomm of anti-competitive behavior.

Qualcomm’s push to buy NXP is one of a number of deals in the busy semiconductor space as vendors look to boost market share and extend deeper into new markets like artificial intelligence and machine learning. Other deals over the past few years include Avago Technologies buying Broadcom for $37 million (and adopting the Broadcom name), Intel buying programmable chip maker Altera for $16.7 billion and Softbank buying ARM for $32.2 billion.