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Qualcomm Fined by EC, Signs MoU With 4 Handset Developers

Qualcomm Inc. QCOM recently signed a memorandum of understanding with four leading Chinese handset developers, namely, Lenovo Mobile Communication Technology, Ltd., Guangdong OPPO Mobile Telecommunications Corp., Ltd., vivo Communication Technology Co., Ltd. and Xiaomi Communications Co., Ltd., for a multi-year sale of RF Front-End solutions. The value of the deal is more than $2 billion. Notably, China is the most important market for Qualcomm after the United States.

However, the company also received a bad news. The EC (European Commission), the regulatory authority of the European Union, has slapped a fine of €997 million (approximately $1.24 billion) on Qualcomm over anticompetitive practices related to mobile chipset sale. The EC claims that an iPhone/iPad modem exclusivity deal between Qualcomm and Apple Inc. AAPL, which lasted from 2011 to the end of 2016, amounted to anti-competitive behavior. Qualcomm abused its dominant market position for 4G LTE chipset and payed significantly to Apple to secure modem exclusivity.

Another Major Recent Development

Only a week ago, in a major relief to Qualcomm, the EC gave its nod to the company for the acquisition of NXP Semiconductors NV NXPI with some restrictive conditions. At the same time, South Korea’s Fair Trade Commission also gave its nod for the deal. Notably, the deal has already been approved by the U.S. antitrust authorities. Only China is left to give its approval, which Qualcomm believes it will get very soon.

The major positive of the contract is that it will enable Qualcomm to diversify its business model. The company is a leader in the mobile chipset market for smartphones and tablets. NXP, on the other hand, manufactures chips for next-generation automotive, industrial and Internet of Things (IoT) segments. Therefore, its acquisition of NXP will help Qualcomm to diversify into highly lucrative end markets such as auto, secured devices, connectivity and secure payments. These segments offer high-margin businesses with strong potential for future growth.

The takeover will also push Qualcomm up the ranks to the second position after Intel Corp. INTC in terms of sales in the broader global semiconductor market. Moreover, the combined entity will emerge a formidable challenger to other large semiconductor firms like Broadcom Ltd. AVGO, Analog Devices Inc. ADI and ARM Holdings.

Likely Effect on Broadcom’s Hostile Bid

On Nov 6, 2017, Broadcom submitted a bid to acquire Qualcomm for a consideration of $130 billion (including $25 billion in net debt). On Nov 13, Qualcomm’s board of directors turned down the offer on grounds of inadequacy, as it is currently the largest mobile chipset maker globally. Notably, Qualcomm has a market cap of around $95.4 billion against which Broadcom’s paltry $105 billion offer is quite disappointing. Also, Qualcomm is uncertain about getting regulatory support for the proposed deal.

Broadcom has since proposed replacing Qualcomm's board of directors and the matter will be put to a shareholder vote in March 2018. With NXP almost in its kitty, the enlarged Qualcomm could make it more difficult for Broadcom to take over the company.

Moreover, the EC’s decision to fine Qualcomm $1.24 billion on charges that it offered discounts in exchange for chip purchase commitments will also raise questions on its business practices. The EC's ruling comes 13 months after South Korean regulators fined Qualcomm $853 million for alleged antitrust violations. The largest mobile chipset maker is also facing $1 billion lawsuit from Apple in the United States related to royalty and rebate payments.

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QUALCOMM Incorporated (QCOM): Free Stock Analysis Report
 
Apple Inc. (AAPL): Free Stock Analysis Report
 
Broadcom Limited (AVGO): Free Stock Analysis Report
 
Intel Corporation (INTC): Free Stock Analysis Report
 
Analog Devices, Inc. (ADI): Free Stock Analysis Report
 
NXP Semiconductors N.V. (NXPI): Free Stock Analysis Report
 
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