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volume xvi issue 10

These blogs and those to come express my thoughts about news in the IT industry impacting meaningful long term trends - microsteps in the evolution of IT that cannot be easily undone.  Newsworthy this month is the merger announced between NXP Semiconductors and Qualcomm.  Originally pegged at $30B, QCOM proposes to acquire NXPI per news late last week for $110 per share, an all-cash deal.  Shares of QCOM are rich at this point and the prevailing advice is to assume a risk-off position here; the deal could fall through, corporate earnings could disappoint, the election is a wild card for stocks anyway you look at it.  If the acquisition is delayed due to regulatory action, then NXPI is a good short here if you have risk appetite.

Valuation discussions are ongoing at this writing.  Both companies have, for me, a most compelling story in the future of the Internet of Things.  NXPI – originally the semiconductor manufacturing arm of Koninklijke Philips N.V – only last December acquired Freescale Semiconductor for nearly $12B.  And Freescale has pedigree as the original semiconductor business at Motorola, added to their portfolio in 1948.  Motorola was one of the first technology companies to make radios for the military, and in recent decades, many applications with semiconductors in the automotive industry.  Think chip-enabled safety and security features, and the Google Self-Driving Car.

Motorola spun off Freescale in 2004.  When NXPI and Freescale combined, they at once became the largest manufacturer of chips for cars.  NXPI also has the lion’s share of the market for near field communication chips that enable tap-to-pay features used in mobile phones.  This technology will increasingly show up in the guts of hardware that allow IoT devices to communicate.  Not to mention, improved capabilities of smartphones, ID chips for credit cards and the like.

Qualcomm of course was a pioneer with spread spectrum technology (CDMA modulation) that became the commercialized wideband radio access method for wireless phones in the 1980’s.  Spread spectrum technology is the foundation of modern 3g and 4g cellular networks. Qualcomm’s OmniTRACS system for truckers was one of the first of its kind used as a commercialized CDMA application.

Inside the Beltway this merger is a sentimental win, as all of these technologies grew out of military research, government and private partnership laboratories, that were later enabled by companies who made the right choices along the way in taking advantage of disruptive improvements in radio – further enabled by the Internet.

Other risk-off comments:  Small cap and mid cap stocks are overvalued at current prices and should be avoided.  If the market experiences a sharp decline or consolidation, large and mega-cap stocks with solid earnings growth and healthy dividends would be good portfolio additions.  I typically look at a stock’s current price-earnings multiple and evaluate as over or under its average multiple for the prior decade, and buy typically when the ratio is under its long term average if nothing has changed with the stock’s fundamentals.  Dividend yields among large cap stocks are fairly valued.
Tom Finkenbinder

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