QCOM QUALCOMM Inc

By Eliot Brown and Bob Davis 

Qualcomm Inc. said it plans to scrap its $44 billion purchase of Dutch chip maker NXP Semiconductors NV on Wednesday after failing to secure approval in China, making the deal one of the most prominent victims of spiraling U.S.-China trade tensions and derailing a central part of the U.S. chip giant's strategy.

China was the last of nine markets that needed to approve the deal, which would have been among the biggest ever between technology companies. The acquisition was announced in October 2016 and extended in April as the chip makers sought approval from China's competition regulators.

Instead, the deal became mired in Beijing's trade fight with Washington.

Qualcomm said Wednesday it won't again extend the agreement, which expires just shy of midnight ET, though it said its decision was pending any new material developments.

Qualcomm's decision to walk follows a round of last-minute lobbying on the company's behalf by senior U.S. officials including Treasury Secretary Steven Mnuchin and Commerce Secretary Wilbur Ross, who tried to persuade their Chinese counterparts to separate the deal's approval process from broader trade tensions, U.S. industry executives said.

The deal's demise puts a leading U.S. technology company atop a list of those affected by the trade battle, which has produced tit-for-tat tariffs by the U.S. and China on billions of dollars of goods across a range of industries.

"It's not just a trade war anymore," said Eswar Prasad, a Cornell University economist who worked in China while at the International Monetary Fund. "It's becoming a more open economic conflict between the two countries." The deal's collapse, he said, "certainly is a strong signal that China is going to use every available lever."

The Chinese embassy didn't immediately respond to a request for comment. Chinese officials previously have said the deal presented potentially negative issues that were difficult to resolve.

Qualcomm said it plans to spend up to $30 billion buying its own stock to placate shareholders. The collapse of the planned merger also requires the San Diego chip maker to pay a $2 billion termination fee to NXP, based on their renewed agreement in April.

The deal's planned termination, which came as Qualcomm reported profit jumped 41% in its latest quarter on a 4% gain in revenue, caps a remarkable period of tumult for the company, the world's top producer of communications chips used in smartphones and other gear.

Just four months ago, the Trump administration intervened to save Qualcomm from a $117 billion hostile takeover by Broadcom Ltd. on the grounds that Qualcomm's technology was vital to U.S. national security. Qualcomm is a U.S. leader in the development of so-called fifth-generation, or 5G, cellular technology that will help connect a slew of new devices to wireless networks, and the White House's intervention effectively designated Qualcomm a national champion essential to battling China's rising might in 5G.

Qualcomm had billed the NXP deal, announced 12 days before Donald Trump was elected president, as transformational, expanding its reach beyond smartphones into areas such as automobiles and smart-home devices. The deal would have added a company with $9.26 billion in revenue last year and some 30,000 employees to Qualcomm, which had $22.29 billion in sales in its latest fiscal year and a similar number of employees.

Originally expected to close by the end of last year, the NXP deal was approved by eight other regulatory bodies, including in the U.S. and Europe. But it dragged with China's antitrust authority, which has broad reach to claim say over deals in which at least one party has a significant presence in the Chinese market.

As the deal languished, trade tensions between the U.S. and China escalated from bellicose rhetoric to tariffs by each side that are aimed at $50 billion of imports from the other. Mr. Trump has threatened to put tariffs on all $505 billion of Chinese imports into the U.S.

With the clock ticking down to Wednesday's expiration, Mr. Mnuchin spoke with Chinese Vice Minister Liu He to push for approval, and Mr. Ross did the same with China's ambassador to the U.S., Cui Tiankai, according to the U.S. industry executives. The U.S. officials argued the Qualcomm decision should be made on the merits of the deal.

Spokesmen for the Treasury and Commerce departments declined Tuesday to discuss the U.S. government's efforts.

Their moves came after President Trump worked to ease U.S. penalties on ZTE Corp. so that the Chinese telecommunications giant could continue to operate after it was found to have violated U.S. sanctions on North Korea and Iran. Some U.S. government and industry officials had expected the ZTE efforts would prompt China to reciprocate and approve the Qualcomm-NXP deal.

Many Qualcomm shareholders had already lost faith that the NXP deal would happen, and were eager for the company to move on. That, combined with the strong quarterly results, helped send Qualcomm's shares up more than 6% in after-hours trading to more than $63, though they remain well below the nearly $69 level they traded at in January, when Broadcom pursued the company.

Qualcomm reported $1.22 billion in net income for its fiscal third quarter, up 41% from a year ago. Revenue came in at $5.6 billion. The results were buoyed by a $500 million partial settlement in a patent dispute with an unnamed company that licenses Qualcomm technology. The company has previously been identified as Huawei Technologies Co. A Huawei spokesman didn't immediately respond to a request for comment.

Still, the NXP deal's collapse adds pressure on Qualcomm and its chief executive, Steve Mollenkopf, who failed to win majority support from shareholders in a March board-election vote. Closing the NXP deal was seen as an important step toward restoring investor confidence after Qualcomm's shares lost over a quarter of their value in the last four-plus years, while the PHLX Semiconductor Index has more than doubled.

Qualcomm also is contending with a legal battle over patent royalties with Apple Inc., long one of its biggest customers. And Mr. Mollenkopf faces a looming challenge from former chairman and CEO Paul Jacobs, son of Qualcomm co-founder Irwin Jacobs, who is trying to raise funds to buy the company and take it private -- a bid largely viewed as a long shot.

--Yoko Kubota contributed to this article.

Write to Eliot Brown at eliot.brown@wsj.com and Bob Davis at bob.davis@wsj.com

(END) Dow Jones Newswires

July 25, 2018 17:43 ET (21:43 GMT)

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