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Strategies & Market Trends : Speculating in Takeover Targets
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From: Glenn Petersen3/2/2015 2:57:17 AM
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Chip Makers Will Merge in Deal Worth $11.8 Billion

New York Times
MARCH 1, 2015

NXP Semiconductors said on Sunday that it would buy a smaller peer, Freescale Semiconductor, in an $11.8 billion deal that would create a big maker of chips for industries as varied as automobiles and mobile payments.

The merger will also offer some relief to the private equity firms that bought Freescale at the height of the leveraged buyout boom, only to see the financial crisis bring the company low.

A combination would help the two chip manufacturers in their dealings with customers like car companies and phone makers that are looking to consolidate their lists of suppliers.

In fall 2013, Applied Materials, an American manufacturer of chip-making equipment, acquired Japanese rival Tokyo Electron for more than $9 billion. Other semiconductor companies, like Qualcomm and Infineon Technologies, have also struck deals, in part to gain greater negotiating leverage.

Both NXP and Freescale have also benefited from a recent boom, as companies of all stripes look to add networking capabilities to their products. NXP in particular has had a surge in demand for so-called near-field communications technology that lets phones — notably the iPhone 6 — interact wirelessly with equipment like payment terminals.

Together, NXP, which has its headquarters in the Netherlands, and Freescale, which is based in Austin, Tex., reported $10.6 billion in sales last year.

“The combination of NXP and Freescale creates an industry powerhouse focused on the high-growth opportunities in the smarter world,” Richard L. Clemmer, NXP’s chief executive, said in a statement. “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 NXP shareholders.”

Under the deal’s terms, NXP will pay $6.25 a share in cash and 0.3521 of one of its shares for each Freescale share held. That values Freescale at roughly its existing market capitalization, although shares of Freescale rose last month after The New York Post reported that the company was exploring a sale.

The discussions between the two companies that eventually led to the current deal began a little over six months ago, according to people briefed on the matter, though potential strategic acquirers of Freescale had made inquiries about a deal several times over the past four years.

Both NXP and Freescale were previously parts of bigger corporations that eventually became targets of private equity firms. NXP was formerly a division of the Dutch electronics giant Philips until it was acquired in 2006 by a group led by Kohlberg Kravis Roberts and Bain Capital for about $10 billion.

Freescale had been a part of Motorola until being purchased in 2006 by the Blackstone Group, the Carlyle Group, TPG Capital and Permira for $17.6 billion, including the assumption of debt.

Both companies soon began to struggle under new ownership, burdened by new and huge debt obligations and falling demand during the financial crisis. Freescale in particular suffered from an economic downturn and the loss of its biggest customer, its former parent.

During its darkest days, Freescale’s earnings before interest, taxes, depreciation and amortization, or Ebitda, plummeted around 80 percent. And its ratio of debt to Ebitda swelled to 13 times.

Faced with potentially needing to put the chip maker into bankruptcy, the company’s private equity owners slashed costs, shook up management and revamped its product portfolio, according to people with direct knowledge of the matter.

The fortunes of the two companies have improved since going public. Since an initial public offering in the summer of 2010, NXP’s shares have leaped 506 percent, closing on Friday at $84.90. Freescale’s stock has doubled since returning to the public markets in June 2011, closing at $36.11.

But with $1 billion in new debt to finance the deal, the combined company will be maintaining a heavy debt load of some $9.5 billion.

At the initial deal price, Freescale’s private equity backers will roughly recoup their initial investment. But the private equity firms are betting that cost savings of about $500 million from merging the two manufacturers will propel the stock price of the combined company.
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