Financials Mergers & Acquisitions

The Week in Review: A tale of two mergers

Qualcomm may buy NXP to accelerate its IoT push, while Sonus snaps up Taqua to address the VoLTE surge

It’s been another week of interesting mergers and acquisitions, either real or rumoured. At one end of the size scale, Qualcomm continues the past year’s trend for huge semiconductor mergers with talks to acquire NXP of Holland for an estimated $30bn-plus.

At the smaller end, but still a fascinating indicator of the times, Sonus has purchased Taqua, adding to its wireline and wireless IP platform at a time of multi-network convergence and of increasing deployments of VoLTE and VoWiFi.

A Qualcomm deal is likely to take a couple of months to negotiate, if it happens at all, and some sources told the Wall Street Journal that the US giant has other irons in the fire too. If it does go ahead, this would see Qualcomm joining a race for consolidation from which it has recently stayed aloof, watching its rivals make their moves, such as Intel’s takeover of Altera and Avago’s of Broadcom.

NXP was part of the consolidation wave itself, buying Freescale last year for $12bn. Both these firms have longer heritages than Qualcomm – NXP was Philips’ chip business while Freescale was Motorola’s, both spun out when their parents adopted different strategies.

That deal gave NXP a dominant position in automotive semiconductors and a broad portfolio across the Internet of Things (IoT), a market which is increasingly important to Qualcomm as pressure mounts on its traditional goldmine in smartphone processors and modems. This will not be a deal about cutting costs or eliminating a rival – it will be all about accelerating Qualcomm’s moves to broaden its offering.

NXP shares rose 17% on the reports, giving the company a market value of $33bn, but  Qualcomm stock was up too, by 6.3% and the company’s market value now stands at $100bn. An NXP takeover would greatly alter the balance of Qualcomm’s business, with a greater emphasis on products rather than the high value licensing arm (though NXP would bring some valuable patents).

More significantly, Qualcomm would finally abandon its practice of sticking to a core product range, with nearly all its efforts going into expanding the mobile system-on-chip (SoC) with ever more integrated processors, GPUs, radios and so on. Its other major acquisition, of Atheros, brought it a whole new product family in WiFi, and the challenges of managing a parallel development and sales stream. NXP would multiply those challenges, with a hugely diverse catalog that would extend Qualcomm’s range from dozens to many hundreds of devices in a large selection of industries.

But Sanford Bernstein analysts estimate the deal could add 30% to Qualcomm’s earnings before any cost savings, despite the “considerable integration/execution risks”. And because so much of Qualcomm’s cash mountain is offshore, there are other advantages to buying a non-US company.

Meanwhile, Sonus Networks will pay at least $20m in cash for Taqua, gaining additional switching and mobile network capabilities. There is potential for additional cash payments if certain revenue thresholds are exceeded.

Taqua has deployed over 400 next generation voice over IP (VoIP) systems for service providers, supporting over 4m subscribers. The deal will help Sonus expand its wireline portfolio by adding a Class 5 Softswitch (T7000) and a multimedia controller (T7100), but will also help with the larger firm’s wireless push, bringing a virtualized mobile core (VMC) and an IP Multimedia Subsystem (IMS) core to complement Sonus’s session border controller (SBC) and Diameter routers for IMS-based mobile systems.

That aspect of the deal mirrors acquisitions by other wireline networking firms like Brocade (which bought VMC maker Connectem), as they look to expand their offerings for mobile and fixed/mobile networks, to target service providers and mobile-first enterprises. Taqua’s VMC is specifically geared to VoIP and VoLTE deployments.

Sonus CEO Ray Dolan said: “This addresses the emerging opportunity for VoLTE and VoWiFi and ties those two radio modalities to existing 2G and 3G networks. This will be an enormous goal market and as it evolves we will shift from the terminology of fixed and mobile to radio access and core.”

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