NXP Semiconductors NV NXPI has moved a step closer to becoming a $40 billion company after it received shareholders’ approval for acquiring Freescale Semiconductor Ltd. FSL in yesterday’s Extraordinary General Meeting. In a joint statement, the companies announced that their shareholders have approved the move in their respective special general meetings casting more than 99% votes in favor of the merger.
NXP Semiconductors further stated that shareholders also approved the appointment of Gregory L. Summe and Peter Smitham as non-executive directors of the new company. The deal, awaiting antitrust and regulatory approval, is expected to be completed by the end of this year.
In March, the two companies entered into a definitive agreement under which NXP had agreed to acquire Freescale for approximately $11.8 billion which includes a debt of nearly $4.9 billion. The transaction is a cash-equity type under which the shareholders of Freescale will receive $6.25 cash plus 0.3521 shares of NXP for each share held by them.
Does The Acquisition Make Sense?
NXP Semiconductors, known for its automotive and chip identification business, has seen massive growth in its portable device and computer business over the past one year. However, the Dutch semiconductor company wants to ensure that its primary revenue generating business — building chips for the auto segment — continues to enjoy a competitive advantage. This move to merge with a fellow automotive chip maker seems to be a step in that direction. Notably, the segment contributes over 50% of NXP’s total revenues.
With the acquisition of Freescale, NXP will become the world’s leading provider of automotive semiconductor solutions and general purpose microcontroller products. The company had earlier stated that the acquisition would be accretive to its non-GAAP earnings per share in the first full year and would generate revenues of over $10 billion combined.
Apart from this, the deal will help NXP in achieving cost savings of $200 million in the first full year post merger and $500 million in annual cost synergies, moving ahead.
Semiconductor Industry M&As Continue
It seems that the semiconductor industry is going through a massive consolidation phase as merger & acquisition (M&A) activities are on the rise. The most recent development in this regard was the acquisition of Altera Corp. by world’s No. 1 chipmaker, Intel Corp. for $16.7 billion, announced last month.
Prior to that, Avago Technologies Ltd. announced a deal to acquire Broadcom Corp. for $37 billion. Post acquisition, the Singapore-based radio frequency chipmaker will become the world’s third largest chipmaker in terms of revenues trailing Intel and Qualcomm Inc. in the first and second places, respectively.
We consider that semiconductor stocks are likely to have a smooth ride in 2015 with the growing demand for technology-based devices among consumers and enterprises alike. According to the Semiconductor Industry Association (SIA), worldwide semiconductor sales are likely to witness a year-over-year growth of 3.4% in 2015 and 3.1% in 2016.
As per the report, last year, the worldwide semiconductor industry recorded sales growth of 9.9% and reached $335.8 billion. The industry is experiencing growth primarily due to developing end markets and new product offerings, supported by process and yield improvements by semiconductor manufacturers.
Continued strong adoption of tablets and smartphones, automotive electronics and the emergence of the new category of wearable devices have led to stronger demand for the processing and sensing devices that run them. These factors are likely to drive the semiconductor industry this year.
Currently, both NXP and Freescale carry a Zacks Rank #3 (Hold). Nevertheless, looking at the growth forecasts and recent M&A activities, it makes sense to remain invested in the industry. Some better-ranked stocks in the semiconductor space are Ambarella Inc. AMBA, CEVA Inc. CEVA and eMagin Corp. EMAN. All these stocks sport a Zacks Rank #1 (Strong Buy).
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