Chip maker NXP Semiconductors NV (NXPI.O) has agreed to buy smaller competitor Freescale Semiconductor Ltd (FSL.N) and merge operations in a deal valuing the combined company at over $40 billion.
The deal, announced by the pair late on Sunday, will make the business the industry leader within the auto and industrial semiconductor markets. The deal pays Freescale shareholders only a small premium over Freescale’s $11.1 billion market value, based on Friday’s closing share price. The companies said NXP will assume Freescale’s debt, pushing the total value of the deal to $16.7 billion.
The agreement is the clearest sign yet that semiconductor companies are regaining the confidence required to pursue big mergers and acquisitions at a time when their major clients, such as mobile phone manufacturers, seek to consolidate suppliers. Freesale also has its chips in consumer products such as Amazon’s (AMZN.O) Kindle e-reader.
Seeing two large chip companies merge is hardly anything new, but at the very same time, we can get our mitts around the companies’ financial positions. First up, Here’s Freescale’s last quarter: $1.10 billion in revenue, and $63 million in GAAP1 net profit. For reference, Freescale claims $273 million in adjusted EBITDA for the period. NXP is larger, recording $1.537 billion in revenue, and $149 million in GAAP net income in the quarter. And again, for reference, NXP claims $327 million in adjusted earnings for the period.
The release doesn’t detail if those savings figures are GAAP or not, but, regardless, they should allow the combined firm to increase its profit by a material amount. The two firms had GAAP profits of $212 million in the last quarter. $500 million in annual savings, holding all other sums flat, would imply that the new operation may quickly expand its per-share quarterly profit.
The companies expect to close the deal in the latter half of this year, NXP will fund the transaction with $1.0 billion of cash from its balance sheet, $1.0 billion of new debt and about 115 million of its shares. Freescale shareholders will own about 32% of the combined company.
Based in Eindhoven, the Netherlands, NXP has operations in more than 25 countries and had revenue of $5.7 billion in 2014. Austin, Texas-based Freescale also has operations in more than 25 countries and had net sales of $4.6 billion in 2014.
Freescale went public in 2011 after being taken private in 2006 for $17.6 billion in a leveraged buyout by a group of private equity firms that included Blackstone Group LP, Carlyle Group LP, Permira Advisers LLC and TPG Capital LP. The buyout firms still own 64 percent of Freescale.