Bottom line: China’s approval of a small US chip merger shows Beijing is actively reviewing such deals again after a brief pause to show its displeasure over US trade tensions, and bodes well for eventual approval of Qualcomm’s purchase of NXP.
Trade tensions between Washington and Beijing have thrown a number of major companies into turmoil, as the two sides spar over the former’s attempts to form a new, more balanced bilateral relationship. Telecoms equipment maker ZTE (HKEx: 763; Shenzhen: 000063) has stolen a lot of the limelight in that regard, as the company’s earlier case involving illegal sales of US products to Iran gets sucked into the fray.
But lower-key on the ladder has been a form of passive aggressive behavior coming from Beijing, which had quietly halted reviews of major global M&A, most notably in the high-tech microchip space. That behavior was costing time and frustration for several companies with pending deals, including Qualcomm’s (Nasdaq: QCOM) pending mega-purchase of Europe’s NXP (Nasdaq: NXPI).
Now it appears that particular logjam could be broken, at least for now, with word that China has approved the purchase of Microsemi (Nasdaq: MSCC) by Microchip Technology (Nasdaq: MCHP). (company announcement) This particular deal was only announced in March, so it’s not that old, and had Microchip buying Microsemi in a deal valued at $8.35 billion.
But much has happened in the time since the original disclosure, including Donald Trump’s announcement of plans to levy protective tariffs targeting $50 billion worth of Chinese exports. China has responded in kind with its own announcement of tariffs targeting a similar volume of American goods.
Foreign media had previously reported that China had ceased its review of the Microchip, Qualcomm and one or two other chip deals involving US buyers or sellers. China did say last month that Qualcomm needed to resubmit its plan for acquiring NXP in that massive $44 billion deal. At the time it said the original plan did not sufficiently address potentially anti-competitive areas that would be created by the deal, which was first announced all the way back in October 2016.
China is now the only major market where regulatory approval is still pending for the Qualcomm-NXP deal. The much-smaller Microchip deal appears to have moved far more quickly, with the US company saying China’s approval means it has now obtained all necessary approvals except from Taiwan. The company added it now believes it can close the deal by next month.
One of the more interesting elements to this story was the stock reactions to Microchip’s announcement, which came before US markets opened on Tuesday. Put simply, there was basically no reaction at all to the announcement, somewhat contrary to what one might think for this kind of good news. Shares of Qualcomm, NXP and Microchip all actually fell slightly during the regular trading session, though it’s worth noting that all three have rallied about 10 percent over the last two weeks.
Frankly speaking, it does seem like investors are mostly discounting all the actions on both sides as mostly talk, and don’t really expect any of these big deals to get derailed due to the trade frictions. The same is probably true for the ZTE story, which seems less politically motivated since it stems from a case that dates back up to 6 years ago, well before Trump became president and the current trade tensions began.
As a longtime China watcher, I can say that this kind of passive-aggressive behavior from Beijing with regards to deal approval is quite par for the course. China is the land of non-transparency, and Beijing is quite good at doing things below the radar without any paper trail or official policy, and then denying everything if and when it’s ever confronted.
At the end of the day, I would probably side with the current market sentiment that seems to think that all the talk is mostly just that, and that business ultimately won’t be that affected by all this posturing. That means the ZTE issue will probably be resolved, and that the Qualcomm-NXP bid will ultimately get approved, albeit it with conditions, after dragging on for nearly two years.