NXP To Buy Freescale For $16.7B

By Ann Steffora Mutschler & Ed Sperling

Dutch semiconductor giant NXP Semiconductors will buy Texas-based Freescale Semiconductor for $16.7 billion—$11.8 billion in cash, $5.6 billion worth of debts, minus $696 million in cash reserves—creating a combined company with a broad-based product portfolio and projected annual revenue of more than $10 billion.

Given the size of the deal, it appears to be based upon perceived market opportunity rather than a weakness of the company being acquired. What’s particularly significant here is the minimal overlap in technology. While both companies play in some of the same verticals, their product lines are quite different.

“NXP has things like high-performance audio DSPs, low-level processors and MCUs,” said Kevin Krewell, principal analyst at Tirias Research. “Freescale is strong in automotive—they’ve been battling with Renesas for No. 1—and they have a networking processor division that has been providing chips to Cisco for many years. They’re also a second source for the PowerPC with IBM. NXP has some products in those markets, but not to the extent that Freescale does.”

The big question is whether this is a one-off deal, or whether it’s the beginning of a consolidation trend as companies begin to plant ever-larger stakes in the booming automotive and Internet of Things markets.

RBC Capital Markets, for one, predicts as many as seven companies may disappear in 2015 due to M&A activity. Doug Freedman, analyst at RBC Capital Markets, issued a report projecting $200 million in annual synergies from the deal, growing to $500 million.

Luca DeAmbroggi, principal analyst for automotive semiconductors at IHS Technology, had a similar upbeat prediction. In his report, he said the combined company’s strongly positioned and one that is able to serve complete automotive semiconductor solutions to all high-growth segments. These segments include infotainment, ADAS, and connectivity as well as the ‘new frontiers’ represented by in-vehicle security and Hybrid and Electric vehicles. In terms of market share, the NXP-Freescale merger would have formed a company with a turnover of $4 billion in 2014, at least $1 billion ahead of the next supplier, Renesas.”

NXP, in an official statement, said the merged company will be a market leader in automotive semiconductors as well as general purpose microcontroller (MCU) products. It intends to take advantage of opportunities for security, connectivity and processing applications. Both companies now offer security chips, Freescale on the crypto processor side and NXP in multiple areas, including chips that are embedded into credit cards.

According to Richard Clemmer, NXP Chief Executive Officer, in the statement, “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 out-grow the overall market, drive world-class profitability and generate even more cash, which taken together will maximize value for both Freescale and NXP shareholders.”

Clemmer will continue on as president and CEO of the merged company once the deal is finalized. The two companies have entered into a definitive agreement.

In 2014, NXP had revenues of $5.65 billion, while Freescale had revenue of $4.6 billion.

As far as synergies for the deal, Tony Massimini, Chief of Technology at Semico Research pointed out that in the Apple iPhone 5 and 6, the sensor hub controller is a microcontroller from NXP. “You’ve got NXP that’s in pretty good with Apple on that. Freescale has been working on the whole sensor hub and sensor fusion business as well, but here at least you would have NXP who has a good foot in the door with Apple on that side.”

Further, he noted, Freescale splits up their business into automotive MCUs and general purpose MCUs with the automotive side containing PowerPC-based products, legacy technology, along with ARM-based MCUs. “As far as the general purpose MCUs, they’ve really filled out a lot of ARM-based products, focused on IoT, as is NXP, so there’s some synergy there.”

Another bonus for the combined company is the senior management. Freescale senior VP and GM of MCUs Geoff Lees spent 13 years at NXP in the MCU business, “so if anybody knows the microcontroller business of both Freescale and NXP, it would be Geoff,” Massimini stressed.

On the other hand, as with any merger, one of the challenges going forward is how to fold in one portfolio and the operations together. Fortunately, Lees has been with both companies in that capacity which should help smooth the transition, he concluded.