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Taking a closer look at NXP, Freescale's merger plans

Posted: 04 Mar 2015 ?? ?Print Version ?Bookmark and Share

Keywords:NXP? Freescale? ARM Cortex? MCU? processor?

Overall, the NXP/Freescale deal is really a marriage of convenience, a bet that the big will survive as the chip industry slows to single-digit growth rates. Market watcher Patrick Moorhead, principal of Moor Insights and Strategy, calls it a tactical merger. He said, "Generally, there are two types of acquisitions, those that are tactical and those that are strategic. Tactical acquisitions typically revolve around improving scale and enabling cost reductions, but strategic acquisitions typically enable brand new markets. NXP's acquisition of Freescale strikes me as a tactical one, enabling the combined companies to cut SG&A expenses."

Freescale's heavy debt load is a fly in the ointment. NXP will add another billion to that debt to finance the deal that is mostly paid for in equity. Clemmer said he expects expanded cash flow will help pay down the debt level to a more tolerable level within six quarters.

Due to its debts, Freescale has been seen as an acquisition target for some time. Clemmer would not comment on other combinations he has considered or other suitors to Freescale. The deal could force such suitors out of the back room to make their own moves in coming days.

Among the many other players, Atmel is often mentioned as a possible acquisition target and Samsung, the industry's second-largest company, is often seen as a suitor. Many recent mergers were similar combinations of two second-tier players edging toward first-tier status. On a call with analysts, NXP's CFO quipped that any merger candidate in the chip industry these days is one-third gorgeous, one third neutral and one third ugly.

Freescale CEO Gregg Lowe, whose position in the new company has yet to be defined, points out his company has grown faster than the overall semiconductor industry for the last two years. The combined company could grow 1.5 times faster than the industry, Clemmer said.

In the end, the two depend on above average growth as table stakes to remain in the semiconductor game. Should they falter for lack of execution across their broad and complex mix of analogue, mixed-signal and digital product segments and geographies they would slide back into a second-tier status from which it would be hard to re-emerge.

The deal marks a fifth life for Freescale. It grew to manhood as the internal chip group of Motorola back when it was a leading communications OEM. As Motorola struggled, it spun out the chip unit as a public company, Freescale. But the standalone company struggled, then went private and then public again.

Today, Freescale and NXP both show signs of rebounding on their own. Their merger could accelerate a unified comeback. But it's not easy to play an upbeat song in an industry marching to a slowing beat.

- Rick Merritt
??EE Times

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