Qualcomm says it will drop NXP bid, barring last-second reprieve

By Michael Martina and Greg Roumeliotis

BEIJING/NEW YORK (Reuters) - Qualcomm Inc , the world's biggest maker of chips for mobile phones, on Wednesday said it intends to drop its bid to buy Dutch chipmaker NXP Semiconductors after so far failing to secure approval from China against the backdrop of wider Sino-U.S. trade tensions.

The $44 billion bid was the largest-ever merger in the semiconductor industry when announced in October 2016, just days before the election of U.S. President Donald Trump, and would hand Qualcomm a new market as growth in mobile phone demand slows.

The deal became embroiled in a trade standoff between China and the United States, two countries who have clashed on issues including ownership of technology and patents.

 

Nearly two years after it was announced, the chipmakers agreed they would call the deal off if they could not win Chinese regulatory approval by July 25, 2359 Eastern U.S. time. No decision came from the Chinese, the last approval needed out of nine required regulators around the globe.

Qualcomm said in its quarterly earnings report on Wednesday it would terminate the purchase agreement at the end of the day pending any new material developments.

Qualcomm needs Chinese approval because the country accounted for nearly two-thirds of its global revenue last year.

Qualcomm also said on Wednesday it would buy back $30 billion in stock if the deal fails, providing more detail to a promise from earlier this year designed to placate shareholders in the event the deal fell through.

Qualcomm could be on the hook for a $2 billion breakup fee and left searching for other ways to expand beyond selling chips for the now-saturated mobile phone market. NXP is a major supplier of chips to the automotive business.

In the hours leading up to Qualcomm's announcement, a source close to the company said it was coming up against a "stone wall" with China's anti-trust regulator, the State Administration for Market Regulation. The Chinese regulator did not respond to a request for comment at the time.

But the source had added that it was still a toss-up whether the deal would be approved at the last minute.

A second source close to Qualcomm had told Reuters hours before the deal's demise it looked unlikely approval from China would come on Wednesday and that the company was making preparations to pay NXP the breakup fee.

Trump has played an outsized role in Qualcomm's fate.

In March, he issued an order blocking Broadcom Inc's $117 billion hostile takeover bid for Qualcomm.

National security officials had worried foreign ownership would weaken Qualcomm's position in the market for so-called 5G mobile communications, allowing China's Huawei Technologies Co Ltd to become dominant.

Shortly after blocking the Broadcom bid for Qualcomm, Trump began imposing tariffs on $50 billion in Chinese goods. He has so far imposed tariffs on $34 billion in Chinese goods and threatened tariffs on up to $500 billion in goods.

The Trump administration also moved to ban U.S. companies from doing business with China's ZTE Corp <000063.SZ>, which hurt Qualcomm's earnings because it supplies chips for ZTE's mobile phones. The administration later lifted the ZTE ban, raising hopes the NXP deal would survive. Members of U.S. Congress however have called for the ban to be reinstated.

China has retaliated with tariffs on $34 billion worth of U.S. goods. But because China imports far less from the United States than vice versa, there have been fears China could also strike back through blocking deals by U.S. companies in China.

Analysts had expected the deal to pass antitrust scrutiny because Qualcomm and NXP worked in different markets.

Qualcomm had $3 billion in non-mobile chip revenue last year, up 75 percent from two years ago. NXP took in $9.2 billion in revenue last year.

Some investors say the deal's demise would allow Qualcomm to focus on cut costs and fix its strained relationship with Apple Inc .

"Any firm news is welcome," said Tom Plumb, founder of Wisconsin Capital Management and a Qualcomm shareholder. "It may be the end of these mega mergers until these companies are no longer political footballs."

(Reporting by Michael Martina in Beijing and Greg Roumeliotis in New York; Additional reporting by Adam Jourdan and Ben Blanchard in Beijing; Subrat Patnaik in Bengaluru and Stephen Nellis in San Francisco; Writing by Sayantani Ghosh; Editing by Muralikumar Anantharaman)