Analysts applaud prospect of Qualcomm buying NXP Semiconductors

After The Wall Street Journal reported yesterday that Qualcomm (QCOM) is in talks to potentially buy NXP Semiconductors (NXPI), several analysts issued notes expressing their opinion that such a deal could significantly benefit the chip making giant. Japanese bank Mizuho upgraded Qualcomm citing the report, while JPMorgan and Cowen raised their price targets on the shares. BACKGROUND: Qualcomm is in talks about buying NXP for "over $30B," The Wall Street Journal reported yesterday afternoon. The over $30B price tag would equate to about $95 per share, SunTrust analyst William Stein reported. UPGRADE: Mizuho upgraded Qualcomm to Buy from Neutral this morning, as the firm believes that an acquisition of NXP Semi would be logical for Qualcomm from a strategic and financial perspective. An acquisition of NXP would leave Qualcomm well-positioned to become the first end-to-end semiconductor auto supplier of the future, Mizuho stated. TARGET INCREASES: Cowen analysts Timothy Arcuri and Karl Ackerman raised their price target on Qualcomm to $74 from $62. Even if Qualcomm winds up paying about $115 per share for NXP, the acquisition would increase its earnings per share by over 20%, assuming that 30% of the acquisition price is paid in stock and 70% in debt, the analysts stated. Moreover, the acquisition would enable Qualcomm to increase its exposure to automotive and industrial, two of the more profitable semiconductor businesses available, Arcuri and Ackerman stated. Together, the companies "could become the dominant player in connected industrial/automotive applications," the analysts predicted. Avago (AVGO) is the second most likely suitor for NXP, but Xilinx (XLNX) is a more logical target for Avago, the analysts believe. They kept an Outperform rating on Qualcomm. Buying NXP "would make good strategic sense for Qualcomm," and Qualcomm's stock would be worth $70 per share following an acquisition of NXP, according to JPMorgan's Rod Hall. Given the slowdown of the smartphone business, Qualcomm's expansion into new markets would be positive, Hall believes. In the wake of the acquisition, Qualcomm's exposure to smartphones would fall to 54% from 84% presently, the analyst estimated. It would have 15% exposure to the automotive chip market, which is expected to grow about 8% year-over-year in 2017, the analyst stated. He kept an Overweight rating on the stock. WHAT'S NOTABLE: Mark Lipacis, an analyst at research firm Jefferies, estimates that Qualcomm may have to pay $136-$172 per share to buy NXP, while SunTrust analyst William Stein says that, based on recent takeover valuations in the semiconductor space, NXP could be acquired for $124 per share. PRICE ACTION: In morning trading, Qualcomm rose another 3.3% to $69.68 while NXP jumped 8.3% to $104 per share, adding to gains that each saw yesterday following the Journal's report. Meanwhile, Broadcom shares are up 0.6% in early trading and Xilinx has advanced 2%.