What began as a sordid rivalry between two hardware suppliers to tech giant Apple (NASDAQ: AAPL) has turned on a profitable head and become a merger deal for setting up a $40 billion semiconductor power player. Netherlands-based NXP Semiconductors NV (NASDAQ: NXPI) announced the inking of a deal with Texas-based Freescale Semiconductors (NYSE: FSL) to merge to form what could very well be a mixed signal-semiconductor leader in the industry, generating revenues of over $10 billion. This resultant company could also be the market leader in both automotive semiconductor industry and general purpose microcontroller units (MCU).
“Today’s announcement is a transformative step in our objective to become the industry leader in high performance mixed signal solutions. The combination of NXP and Freescale creates an industry powerhouse focused on the high growth opportunities in the smarter world. We fully expect to continue to significantly outgrow the overall market, drive world-class profitability and generate even more cash, which taken together will maximize value for both Freescale and NXPI shareholders,” NXPI Chief Executive Officer Richard Clemmer said in a press release.
NXPI will compensate Freescale shareholders with $6.25 in cash and 0.3521 in NXP stock to cover the $11.8 billion in value that Freescale will set it back –Â funding for which is split between $1 billion cash and $1 billion in shares and bonds. The announcement suitably buoyed NASDAQ Composite to a closing high of 5000 on March 2.
Conducting big business
NXPI used to be a subsidiary of Dutch electronics company Phillips (AMS: PHIA). The current industry leader co-invented the near-field communications (NFC) technology that powers the iPhone 6 and iPhone 6 plus. Revenue from its consumer electronics business grew by 46% from the previous year to generate $712 million in 2014, while automotive and chip ID business grew by a modest 12-13%. NXPI is also credited with developing the M-series coprocessor technology that was first used in the iPhone 5s.
An old-timer in the semiconductor industry, Freescale used to sell chips to Apple in the 1980s. It functioned as a division of Motorola (NYSE: MSI) back in those times. The original Mac computer came with the Motorola 68000 chip which was a brainchild of Freescale. Freescale did well supplying to Apple until Intel took its business away in 2006. Troubles began to pile up from then on until cash-strapped and debt-ridden Freescale was forced to offload patents. In 2011, Apple purchased patent for 200 wireless communication hardware. It was in these troubled times that Freescale and NXPI became bitter rivals. Once Freescale went public in 2011, Blackstone Group LP (NYSE: BX), Carlyle Group LP (NASDAQ: CG), Permira Advisers LLC and TPG Capital Management LP bought out 64% stake in the company.
Industry reshuffle
As if saving the best for last, this the largest of the four merger and acquisition deals in the semiconductor industry this year. It started with Lattice Semiconductor (NASDAQ: LSCC) buying Silicon Image Inc (NASDAQ: SIMG) for $600 million in January, followed by the $287 million deal between MaxLinear, Inc (NYSE: MXL) and Entropic Communications, Inc (NASDAQ: ENTR); and Avago Technologies Ltd’s (NASDAQ: AVGO) $600 million buyout of Emulex Corp (NYSE: ELX) in February. Clearly, semiconductor companies are reacting to major clients, such as mobile phone companies, looking to consolidate suppliers.
NXPI is looking at $200 million in cost savings in the first year of the merger, expected to come into effect in the latter half of this year, and $500 million of annual cost savings.
“We believe this merger, which combines two highly successful and complementary companies, will create significant value for Freescale’s and NXPI’s shareholders, customers and employees. Both companies have built leadership positions and have a sharp focus on delivering superior value to customers. Our combined scale, size and global reach will position our new company to deliver sustainable above market growth. It will also serve to accelerate the strategic plans both companies have invested in, enabling us to deliver more complete solutions to customers,” Freescale Semiconductor President and Chief Executive Officer Gregg Lowe added.
