By Haozhe (James) Huang , Friedrich von Storch, Yujia Bao (IE Business School), Olivier Baverez, Dorian Song, Théo Leleup (HEC)
Photo: Viktor Theo (Unsplash)
Overview of the deal
Acquirer: Qualcomm + SSW Partners
Implied Equity Value: $4.5 bn
Total Transaction Size: $4.9 bn
Closed date: Oct 4, 2021
Target advisor: Morgan Stanley and Rothschild & Co. (financial), Skadden, Arps, Slate, Meagher & Flom LLP (legal)
Just when Veoneer and Magna looked like they had reached an agreement for $3.8 billion, Qualcomm bid $4.5 billion, outdoing its competitor (the latter will, however, receive a compensation of $110 million). Through the acquisition of the Swedish company, the famous chipmaking company hopes to diversify its activity from telecommunication to smart cars. This deal follows the acquisition of Nuvia for $1.4 billion, a startup committed to improving computing performance, strongly indicating Qualcomm’s ambition to expand its activity into other fields. Qualcomm is betting on the fast-growing market for electronic components for cars to complement its expertise as a chipmaker (notably the SnapDragon chips). Consumers can expect new generations of chips for connected cars, making driving safer as traditional carmakers find it hard to produce good quality electronics themselves.
Company Details (Acquirer – Qualcomm)
Qualcomm is an American company specialised in implementing and designing telecommunications solutions. It is a leader in the design and marketing of cell phone processors. One of its particularities is that it is a fabless company. The firm is renowned for inventing and developing CDMA (Code Division Multiple Access), a transmission coding technique.
Founded in 1985, headquartered in San Diego, United States
CEO: Steven M. Mollenkopf
Number of employees: 33000
Market Cap: $184.72 bn
EV: $188.05 bn
LTM Revenue: $33,566 million
LTM EBITDA: $11,371 million
LTM EV/Revenue: x5.72
LTM EV/EBITDA: x16.9
Company Details (Target – Veoneer)
Veoneer, a spin-off of Autoliv’s electronics and automated driving divisions, was founded in 2018. The firm provides automotive technologies to all major automakers in Stockholm, Sweden. Its products include radars, lidars, thermal night vision cameras, vision systems, advanced driver assistance, and autonomous driving software.
Founded in 2018, headquartered in Stockholm, Sweden
CEO: Jan Carlson
Number of employees: 9,200
Market Cap: $3.91bn (as of 24/01/2022)
LTM Revenue: $1.66bn
LTM EBITDA: $-265bn
LTM EV/Revenue: 2.29x
LTM EV/EBITDA: -16.25x
Projections and Assumptions
The first consequence of Qualcomm’s offer and the agreement reached with Veoneer is the termination of the previous agreement that the Swedish company had before with Magna International. Magna International made an 18% lower offer a few months prior. Consequently, Veoneer will pay $110 Million in compensation to Magna.
At the close of the deal, Qualcomm will take over the «Arriver» activity of Veoneer, which manufactures very innovative software in the automotive industry to enrich its offer of Advanced Driver Assistance Systems (ADAS). For its part, SSW Partners, partner of Qualcomm in the acquisition, will obtain the other divisions. Qualcomm stock soared by more than 20% following the agreement announcement, showing the confidence of the stock market in the acquisition.
Underlying the acquisition of Veoneer by Qualcomm and SSW is a clear long-term strategic rationale. Post-transaction, Qualcomm will take ownership of Veoneer’s Arriver business, which manufactures driver assist, driver policy, and computer vision systems as well as software for sensors such as LiDAR or camera-based vision. The chipmaker will integrate Arriver with its existing Snapdragon Ride platform, which provides solutions for Advanced Driver Assistance Systems (ADAS). These systems increase car and road safety by reducing the human-error component in accidents using advanced technologies such as cameras and sensors to assist the driver. Qualcomm intends to build a compelling platform and one-stop-shop for ADAS applications through integrating acquired and in-house technologies. Previous to the Veoneer acquisition, Qualcomm acquired CPU maker NUVIA, which designs CPUs for digital devices and creates applications for digital cockpits and driver-assist systems. Snapdragon has since integrated these technologies from NUVIA. With one integrated ADAS platform that offers multiple applications and possibilities for carmakers to design and build their features on top of Qualcomm’s chips and software, the firm fortifies its position in the fast-growing ADAS application market.
Research company MarketsandMarkets expects the global ADAS market to grow at a CAGR of 11.9% to $74.9 billion by 2030, underscoring the strategic significance of this market. Qualcomm’s automotive segment is only marginal to the firm, with $975 million in revenue in the fiscal year ending September 26, 2021. However, it is one of the fastest-growing segments inside Qualcomm, with a growth of more than 51% in 2021, illustrating the long-term potential of the automotive industry for the chipmaker. Furthermore, the tie-up will offer Tier 1s and original equipment manufacturers an established alternative to Mobileye. Intel acquired Mobileeye in 2017 and currently has an 80% market share of the machine vision market for vehicles.
Risks and Uncertainties
Despite the attractiveness of the ADAS application market, the ongoing upper stream supply shortages of semiconductors, driven by mobile phones, servers, gaming, among others, continue to put cost pressure on Veoneer. The shortage supply remains a challenge, although, according to IDC, the semiconductor industry will see normalization and balance by the middle of 2022. While Venoeer’s business continues to see growth, Qualcomm faces challenges to integrating its current product portfolio, including driver-assist, driver policy, and computer vision systems in its existing Snapdragon Ride platform, which would potentially require significant investment.
Meanwhile, although vehicle sales rebounded slightly after 2020’s dismal numbers, the growth of the automotive market remains very low. Along with the new Omicron variant, the significant increase in global oil price in 2021, caused by higher demand by the recovering economy, could potentially hinder the recovering automotive industry and, in turn, the growth of the ADAS application industry, in the short run. Moreover, the applicability of the ADAS application remains a challenge due to reasons such as lack of required infrastructure in developing countries, safety concerns regarding the security of the system, and doubts on to what extent the system needs a balance between automation and manual override, among other factors.
Lastly, the premium paid by Qualcomm was at approximately an additional 18% to its former agreement with Magna, equivalent to 73.2% over the one-month volume-weighted average stock price of Veoneer before the announcement of the Magna Merger. The very high premium paid is possibly unjustified given all the risks and uncertainties in the market.