To say that the president’s willingness Sunday to cut a deal with China relaxing U.S. sanctions against ZTE took everyone by surprise may be an understatement. Less of a surprise, perhaps, is the apparent quid pro quo.
First thing Monday morning, China resumed its review of the proposed $40 billion merger of Qualcomm Inc. (NASDAQ: QCOM) and NXP Semiconductors N.V. (NASDAQ: NXPI). A happy coincidence no doubt.
In mid-April, China’s Ministry of Commerce put its review of the merger on hold and forced Qualcomm and NXP to withdraw then refile their merger notices. Both companies did so, of course, and that moved the deadline for shareholder acceptance of the merger from April 25 to July 25. If the deal is not completed by then, Qualcomm must pay NXP a $2 billion breakup fee. Both parties would like to avoid that.
Qualcomm gets about 65% of its revenues from sales to Chinese companies, including ZTE. U.S. sanctions against ZTE would have hit Qualcomm’s top and bottom lines, and a negative decision on the merger with NXP would have had an even wider impact. But that was certainly the direction things appeared to be heading.
ZTE pleaded guilty last year to violating U.S. sanctions against Iran and agreed to pay fines totaling $1.2 billion along with additional penalties, including firing several executives and withholding bonus payments to others. Then last month the company admitted that it lied to the United States about withholding bonuses and the U.S. Department of Commerce denied ZTE access to U.S. companies and equipment.
Without access to U.S. technology, ZTE was on its way to the dustbin of history sooner rather than later. Then, mirabile dictu, the U.S. president tossed ZTE a lifeline and new life was breathed into the Qualcomm-NXP merger.
NXP stock jumped nearly 12% on Monday to $110.74 and traded at $114.00 in Tuesday’s premarket, up an additional 3%. The stock’s 52-week trading range is $90.83 to $125.93.
Qualcomm got a Monday share price boost of about 2.7% to close at $56.74, and it traded at $56.95 in this morning’s premarket session. The 52-week range is $48.56 to $69.28, and the 12-month price target is $62.50.