Who's Worried About the STM/NXP Merger?

In my last article on the STMicroelectronics (STM), NXP Semiconductors merger, I analyzed the joint venture from STM’s perspective. The merger is a clear sign of further consolidation in the 3G space. To understand this further, it is also important to look at how other players in the vendor space can be impacted by this merger.

The importance of this merger primarily comes from my thesis that Texas Instruments [TI] (TXN) has fumbled in its 3G strategy, leaving its huge market share wide open for other vendors to steal from the company. Its huge Nokia (NOK) account is especially at risk. The Finnish handset maker has already moved towards a multiple vendor strategy sourcing 3G chips from STM. Last year, it committed about 200 engineers to STM for the latter’s 3G chipset development program. Nokia is essentially focusing away from chipset IP and development. This has worked against TI and into the hands of STM and Broadcom (BRCM)(whose EDGE solutions are now being sourced by Nokia.) You can get further insights into TI’s wireless strategy and its potential pitfalls in my valuation series here, here and here.

The joint venture can further consolidate this relationship between Nokia and STM. Further, the complete portfolio of connectivity solutions will make it very attractive for the future smartphones from Nokia and the others. So, the joint venture will likely add to TI’s wireless woes. The impediment that I see is performance. The joint venture will still be behind Infineon, InterDigital, Icera and Qualcomm on performance. The hope is that a renewed R&D thrust will help narrow the gap in future designs.

Broadcom is another vendor for whom the merger could possibly cause headaches. The Irvine-based company has in the past made its ambitions apparent – to work diligently towards the coveted third spot in the mobile vendor matrix. Broadcom has been very aggressive in its mobile campaign, not just with product announcements but also in its legal battles with Qualcomm to defend its IP position. The bottom-line is that it is also looking to grab market share from TI. If the joint venture can improvise on the connectivity solutions and build a stable and complete platform, it will give Broadcom a run for its money. But, for now, Broadcom will still have the time-to-market advantage. You can read more on Broadcom’s wireless outlook and my valuation analysis here, here and here.

Qualcomm (QCOM) is less likely to be threatened by the joint venture though the latter now has access to Samsung. Qualcomm’s technology leadership, its support network and its longer-term view of the mobile space places it on firmer ground. Infineon (IFX), which is likely to be at the heart of iPhone 3G, will now be a distant second in the European vendor matrix. InterDigital (IDCC), Infineon’s 3G partner, will have to rely on performance as it tries to gain in the smart-phone market. Marvell (MRVL) and Icera among others will also come up with niche selling points to counter such consolidation.

So, while the price STM paid for the merger can be debated, there is no doubt in my mind that it is a consolidation that will send some vendors scampering. I have several questions in my mind now, including: Will someone also pick up Freescale (FSL)? Will TI target an acquisition that will give it 3G baseband capabilities, perhaps InterDigital or Icera? Will InterDigital and Infineon further formalize their strong alliance to gain scale?

Consolidation is in the air, and I can’t wait to see how the vendor matrix ends up a couple of years from now.