Like their name states, semiconductors conduct part of an electrical current. This puts them in an interesting position between insulators that conduct next-to-none of an electrical current and low-resistance materials that conduct most of an electrical current, which in turn, makes them one of the cornerstones of modern civilization. Semiconductors are used to make computer chips. This is because computer chips must be able to switch between an on state and an off state while remaining at room temperature, which excludes insulators because the resulting computer chips would be difficult to turn on and low-resistance materials because the resulting computer chips would be difficult to turn off.
As a result, semi-conductors see extensive use in modern civilization because computer chips see extensive use in modern civilization, which in turn, means that semiconductor news should interest investors as well as other people who watch the markets. In particular, this means that said individuals should be interested by Qualcomm’s plan to buy NXP in exchange for $47 billion.
What is Qualcomm?
Qualcomm is not as famous as some of the other tech companies out there, but it is nonetheless one of the most important members of the tech sector. Something that can be seen in how it maintains more than 200 locations situated in countries all around the world, which are coordinated from its corporate headquarters in San Diego in the United States.
Regardless, Qualcomm earns most of its revenues through two methods. First, it makes computer chips as well as the software needed to make the best use of those computer chips, which explains its importance in the tech sector. Second, it licenses out its patents to other tech companies that want to make use of those techniques and technologies, which explains its interest in the continuing innovation that is so critical to the tech sector. Summed up, while its profit-making has not been smooth and uninterrupted throughout the entire course of its existence since it was founded in 1985, Qualcomm is a proven success.
What Is NXP?
NXP is not a member of the same market as Qualcomm. Instead, it is a member of a related market, seeing as how it is a manufacturer of the semiconductors that see use in computer chips as well as a significant innovator in its own right. Something that can be seen in how it possesses more than 9,000 issued and pending patents, which are increasing in number all the time as it continues to make progress in its chosen field of specialization.
Furthermore, it should be noted that NXP is as important in its market as Qualcomm is in its market. This can be seen in how it is not just the fifth biggest supplier in its market but also the single biggest supplier for the automotive, digital networking, and secure identification industries. As a result, it is clear that NXP is a worthwhile investment, though much more so for Qualcomm than for most other businesses.
Why Is Qualcomm Buying NXP?
There are a number of reasons that might have motivated Qualcomm to buy NXP for $47 billion. For example, the two companies’ chosen fields of specialization complement one another, meaning that their positions in their respective markets should strengthen in time as a result of their newfound relationship. This is particularly important because NXP has been losing some ground to some of its competitors in recent times, meaning that the sharing of expertise and experience could be what it needs to surge ahead.
Furthermore, it is interesting to note that in spite of this overlap, NXP is a real chance for Qualcomm to engage in some much-needed diversification. After all, Qualcomm has either no presence or next-to-no presence in the places where NXP is strongest, meaning that the $47 billion deal will not just improve on its existing capabilities but also add a number of mature capabilities all at once. Something that should serve to make it that much more resilient because diversified holdings means that no single disaster can hope to disrupt all of its revenue-earning operations, which is a real threat to companies that specialize too much.
Whatever its reasons, Qualcomm has revealed a fair amount of information about its plan for the purchase, which should instill confidence in people who are still not sure whether it knows what it is doing or not. In brief, Qualcomm will be offering NXP investors $110 per share, though this process will not be complete until sometime in 2017 at the earliest. Part of the funds used for the purchase will come from saved-up cash, but the rest will come from about $11 billion in loans and other forms of financing.
Considering that the purchase is expected to add more than $10 billion in earnings before interest, taxes, depreciation, and amortization on an annual basis, the purchase should be a profitable one, so much so that Qualcomm expects to be able to pay the entire $11 billion within a short period of two years.
What Does This Mean?
With that said, it is important to note that even though the two companies have consented to the buy, there is still a chance that it will not happen. This is because semiconductors are so important that the buying-out of semiconductor companies often receive even lengthier reviews for potential concerns than normal, meaning that the process is expected to take months and months.
After all, while bigger companies can provide benefits in the form of economies of scale, their increased power relative to their customers can make them dangerous as well, which is why the relevant authorities take so much interest in such cases.
However, should Qualcomm receive approval for its plans to buy out NXP, it is probable that the two companies will strengthen in their respective markets. While it is still too soon to tell how this will impact those markets as well as to what extent, it seems that their competitors should start thinking about making some strategic alliances of their own to serve as a counterbalance.