The smothering of China's Qualcomm-NXP merger heralds a new era

At the end of May, a team of Qualcomm lawyers arrived in Beijing to conclude an agreement with Chinese competition regulators, optimistic that the acquisition of the Dutch company NXP.

Just three days later, Qualcomm's deal hopes were destroyed. On May 29, US President Donald Trump announced that his government would impose punitive tariffs of $ 50 billion on Chinese exports, contradicting the claims of Treasury Secretary Steven Mnuchin and Chinese Vice Premier Liu He, according to which the two largest economies the edge of a trade war.

"All technical issues have been resolved," said a person informed of the discussions of the San Diego-based company in Beijing. "From Qualcomm's point of view, everything that needed to be done was done."

But it is then that Mr. Trump's commercial war bomb arrived. "The regulators started saying things like," your president embarrbaded Liu He, "" he offended the Chinese people "and all that," added the person.

At midnight, Wednesday in New York, Qualcomm sits down in front of the inevitable. With the authorization of China still outstanding, he announced that he would not proceed to NXP agreement. "We have obviously been caught in something that was above us," said Steve Mollenkopf, General Manager of Qualcomm, just hours before the transaction was due.

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By sitting down as the time has pbaded, the Chinese government has not only effectively killed a transformative deal for Qualcomm, but has also potentially changed the landscape of mergers and acquisitions for American technology companies in the current political climate. unlikely to improve anytime soon.

National antitrust regulators around the world can look at M & A transactions if these companies have significant activities in the country, but it is only in recent years that China has exercised this right

. The US president reiterated his intention to badess punitive tariffs on all Chinese exports to America, worth more than $ 500 billion last year. In the event of a total trade war, China would not be able to respond in kind because it did not import nearly as much from the United States and should consider other forms of retaliation. Playing the regulatory spoiler in big strategic US deals like Qualcomm is an option.

China's refusal to approve the deal puts a "big red light on any major M & A in the semiconductor industry in the short term," said Geoff Blaber, badyst at CCS Insight. "Technological issues are obviously very important, especially since semiconductors are a major strategic priority for China," he added. "That combined with … Qualcomm has become an unfortunate victim of the general climate."

More than $ 200 billion in M ​​& A deals were announced in the semiconductor industry in 2015 and 2016, including Qualcomm and NXP, because small scale security manufacturers, big players have diversified into the slowdowns of the PC and smartphone sectors and everyone has been trying to position themselves for the advent of 5G, the next-generation wireless technology to be deployed later this year.

We were obviously caught in something that was above us

"The activity has slowed down considerably," says semiconductor badyst Mizuho, Vijay Rakesh. "Now we are at a sudden stop."

Qualcomm and NXP started talking in early 2016, when the Dutch chipmaker was looking for a buyer for its digital network business. In June 2016, the CEOs of both companies were discussing an acquisition of NXP in its entirety.

The conclusion of the agreement should have been simple, with limited overlap between the two companies' product portfolios and thus few competition concerns. Before the two companies bogged down in Beijing, their agreement was allowed in eight other jurisdictions. But an agreement designed prior to Mr. Trump's election would ultimately become one of the most publicized victims of his government's aggressive trade policy.

Technically, the Chinese government did not block the deal. After asking Qualcomm to resubmit its application in mid-April, the State Market Regulation Authority had six months to make a final decision.

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But China's silence on the agreement cast a shadow over many future deals that will fall under the regulator's jurisdiction. Investors who have acquired a stake in NXP have suffered greatly from the dissolution of acquisitions and now view China's presence in the global market as a major risk factor.

"We were completely blind," said an investment manager who held an important position in NXP.

The addition of China to the global regulation of M & A "has just made this case much more difficult," added the investor. The largest aerospace transaction in history, the acquisition of Rockwell Collins by United Technologies for $ 23 billion must also obtain regulatory clearance to close before the September deadline, noted the # 39; investor. In May, Beijing officials said they would authorize the Qualcomm-NXP deal in exchange for Trump's willingness to lift crippling sanctions on ZTE, the Chinese telecommunications firm that admitted to violating a US embargo on technology exports to Iran and North Korea. Qualcomm helped his cause in Beijing by quietly pushing for a respite for ZTE, who was also a major customer.

If the ZTE exchange for Qualcomm had been reached before Mr. Trump resumed his trade hostilities with China, Qualcomm would soon own NXP. When that was not the case, a major US institutional investor began to hedge his bets. "We are still a long time NXP but we are protected and our position is much smaller than it was," said a firm strategist on Wednesday before the deal was reached. collapses.

His company began to cover his position when "the trade war began and it seemed that the original ZTE-Qualcomm agreement was going out through the window".

Additional reportage by Sherry Ju Fei, Yuan Yang and Xinning Liu