In a major shakeup on the chip market, mobile phone chipmaking titan Qualcomm (News - Alert) is reportedly embarking on a plan to acquire a similar company, NXP Semiconductors, in an eight-figure deal that will give Qualcomm a lot of extra leverage and a better hold on markets beyond the smartphone.
The current reports suggest Qualcomm has agreed to pay $110 a share in cash for NXP in a deal valued at $47 billion. NXP is currently the biggest supplier of chips used in automotive applications, and with it under Qualcomm's wing, Qualcomm will be able to spread out into other markets and take some stress off its need to succeed in smartphones alone. Qualcomm will pay the tab on this deal using current stocks of cash on hand as well as taking on some new debt issues in a bid to finance the project.
Essentially, Qualcomm is looking to broaden its market from smartphones—which have pretty much reached a saturation point, dampening returns—and expanding into markets that are about to start up in earnest, like connected cars, potentially including the self-driving car market. Right now, the bulk of Qualcomm's revenue comes from smartphones, and with this market cooling off, Qualcomm needs a big new winner. Given that NXP and Qualcomm's combined revenues would measure over $30 billion, it's readily apparent why Qualcomm is interested.
Throw in a market that's projected to be worth $138 billion by just 2020, and a projected $500 million in annual cost savings just two years after the deal closes, and this combination of cost savings and expanded market opportunities makes a good deal for Qualcomm, if all goes as planned.
Qualcomm CEO Steve Mollenkopf noted, “It’s no secret that we’ve been looking around. If you look at our growth strategy it’s to grow into adjacent markets at the time that they are being disrupted by the technology of mobile.”
It's a smart move for Qualcomm, because right now, there aren't very many models of connected car out there, and even fewer models of self-driving car, which means a lot of opportunity still unrealized. That means most of this market is still available for entry, and if Qualcomm can get a product line ready to go before the rest of the field, Qualcomm stands a good chance of being to cars what it was to smartphones. That's a position devoutly to be wished, to borrow from the Shakespearean. To do that, it's going to have to have a company that's already involved in this future market, and NXP Semiconductors (News - Alert) is just such a company, even if it's not making the specific chips that will be needed just yet.
It's the kind of move that cements a future, and Qualcomm's future is now looking that much brighter for segueing from a company that made chips for a mature product line to one that's making chips for a product line about to take off.