How OEMs Can Compress Their Cash-Conversion Cycle
by 
NXP Semiconductors N.V. needs a Plan B and maybe even Plans C and D. Broadcom Ltd.’s unwelcomed $130 billion offer for Qualcomm Inc. has thrown NXP’s plans of being absorbed by the American chipmaker into disarray. To avoid damages to its operations, NXP should develop an alternate growth strategy and start sharing this immediately with customers, suppliers and even key employees.
Until now, NXP’s main concern has been whether regulators and shareholders will approve Qualcomm’s $47 billion acquisition offer. Since the announcement of the transaction on October 2016, NXP’s board of directors and executive team had hung the company’s future on Qualcomm. They spent the last one year selling the proposal to investors, employees, customers and suppliers. It was all about NXP and Qualcomm, together, marching off to conquer the world of automotive ICs, communications, IoT, industrial electronics and other markets.
They are now contending with a third-party – Broadcom – whose interests diverge somewhat from those of NXP. The Dutch semiconductor company’s hopes of leveraging Qualcomm’s bigger financial resources to expand into new industry sectors, fund R&D, reduce debts, cut operating costs and boost profit margins now look doubtful. They may yet happen: if Qualcomm wins regulatory approval for the NXP transaction; if shareholders accept the buyer’s offer; if Qualcomm’s board of directors vote to approve Qualcomm’s purchase offer and if the deal receives regulatory stamp of approval or; if Broadcom walks away from the Qualcomm offer. So many ifs.
Broadcom has thrown a monkey wrench into NXP and Qualcomm’s well-laid out plans. Its offer for Qualcomm was as unexpected as it was disruptive. Broadcom is not especially interested in NXP and has emphasized it would go ahead with the acquisition of Qualcomm with or without NXP. This can quickly leave NXP in limbo. While Qualcomm has spurned Broadcom’s offer, a change in the composition of the board of directors at a shareholders’ meeting slated for December could swing critical votes in a different direction. Additionally, speculations are rife that Broadcom may hike its offer for Qualcomm, increasing the pressure on the company.
The only certainty facing NXP today is that the management still has a business to run. That task has become more difficult – as happens with all acquisitions before and after a deal is closed. Customers are wary, unsure of what lies ahead. Suppliers are cautious, too, confident that changes will occur in their relationship with NXP but uncertain about the nature of those changes. Employees also know that layoffs will accompany the acquisition because of redundancies the company would hope to eliminate and necessary cost-cutting goals the buyer expects to meet. The process has been delayed by regulators, the last of which will only give its blessings or disapproval sometime next year. It’s not a great time to be in NXP’s orbit.
The company can change the dynamics and the messaging that the market is currently receiving about its operations. Without violating the terms of the agreement with Qualcomm or indicating the transaction is dead, it can send strong signals that its prospects remain stable and profitable, notwithstanding the current developments.
NXP can remove the cloud of uncertainty hanging over it by letting the market know it has alternate plans in place. The message starts with the company acknowledging what’s become obvious: NXP will not return to its old ways. It will have to make numerous changes to its operations, starting with the departure of current president and CEO Richard Clemmer.
At 66 years old, Clemmer is ripe for retirement in an industry where most CEOs typically leave office at between 60 years and 65 years of age. Clemmer has been involved with NXP for about 10 years, first as a member of the board of directors and, in the last 8 years, as head of the management team. The NXP-Qualcomm transaction was expected to be his Swan Song, following which he would retire and, perhaps, rejoin Kohlberg Kravis Roberts & Co. as an advisor.
Prior to leaving, though, Clemmer will have to see NXP through the Qualcomm-Broadcom ordeal. Considering how long this transaction has been playing out and the disruptive effect it has had on the parties, the best scenario right now is for Qualcomm to receive regulatory approval while fending off Broadcom. It is uncertain the two objectives can be realized. Regulators in the European Union won’t offer their verdict till next year and investors remain skittish. Shareholders want Qualcomm to increase its offer and have refused to wholeheartedly endorse the transaction.
EPSNews recommend NXP prepare for the possibility of continuing life as a solo-enterprise by taking the following steps:
- Prepare for a CEO Transition: Clemmer is on his way out. There should be no doubts about this. The investment community is aware of this but didn’t see it as a problem till now because of the pending acquisition. The current uncertainty about the future of the deal is raising questions about the company’s CEO transition plans. NXP can quell this by assuring shareholders it has strong candidates that could take over when Clemmer departs.
- A New, Independent, Growth Plan: NXP today is running on the adrenaline rush of its pending takeover by Qualcomm. This process has now become lengthier than normal and is spooking suppliers, customers and even employees. The company should not only develop an alternate growth plan but also discuss this with customers and suppliers. They need to know there is a viable plan otherwise they will establish a holding pattern on designs and development works until they are offered visibility into NXP's growth strategy.
- A Clear M&A Strategy: Nothing destroys value faster in the semiconductor market than the absence of a clear M&A strategy. The consolidating market reeks of fear an enterprise might be left dangling. NXP must let investors know how they expect the company to evolve. Will it be a consolidator or is a target for acquisition? Companies typically don’t announce the specifics of their M&A strategy but NXP’s peculiar case means it can only benefit from dispelling the uncertainty that has descended on it with the Qualcomm-Broadcom entanglement. If Qualcomm accepts Broadcom’s offer and terminates the NXP deal, it will have to pay NXP $2 billion to walk away. NXP can let the market know how it would use such a windfall. It can keep its market value buoyant by expressing interest in buying other chipmakers, following the track it took with the purchase of Freescale Semiconductor. Alternatively, it can use the proceeds to pay down debts, thereby reassuring investors of its deleveraging efforts.
- Executives and Engineering Employee Retention Plan: Corporate executive raiders are circling NXP, but more will come if the current uncertainty persists. Many of the company’s core employees, especially in engineering, are already seeking new employment opportunities. The company can tie down these key employees and simultaneously reassure the market by offering them incentives and publicizing some of these.
- Seek other Buyers: Qualcomm and other market forces have driven all conversations about NXP’s future since late last year. The management had no other choice till now. With Qualcomm itself an acquisition target, NXP must look out for what is in the best interest of its shareholders by exploring other opportunities to sell itself. This would depend on the terms of its current engagement with Qualcomm. NXP would have to pay a break-up fee of $1.25 billion if it terminates the agreement but a new buyer would be inclined to cover this. NXP has waited long enough for Qualcomm to receive regulatory and shareholder consent. Broadcom’s entry into the fray means Qualcomm will face additional delays before it can complete the NXP offer. That’s damaging for NXP and the situation must not continue.
Bolaji Ojo is editor-at-large of EPSNews. The views expressed in this blog are those of the author alone who promises to base his sometimes biased, possibly ignorant, occasionally irrelevant but absolutely stimulating thoughts on the subjective interpretation of verifiable facts alone. Any comments should be sent to the author at bolaji.ojo@epsnewsonline.com.
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Just looking at this article a few months later and here we are as NXP shareholders still waiting on a new tender. I realize the EU approval process took a while but NXP stock would likely be trading 135 plus without the QCOM bid. Good synopsis Bolaji Ojo