NXP Has Buyer’s Glee as Stock Surges on Freescale Deal: Real M&A

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NXP Semiconductors NV’s shareholders are so enthused by the company’s plans to make its biggest purchase yet, they’re pushing the stock to a bigger gain than the target.

The $23 billion Dutch chipmaker rallied as much as 18 percent in New York trading on Monday, a day after announcing that it’s acquiring Freescale Semiconductor Ltd. for about $16.7 billion including debt. Freescale’s rise wasn’t as large, even counting its advance since last month when reports surfaced that it was exploring a sale.

Typically, when a merger is announced, shares of the target increase as investors anticipate a premium. The acquirer’s stock may also rise, though usually not as much, as the buyer must still pay for the purchase. In this case, the cost savings outweigh any shareholder concerns. And combining with Freescale will help NXP better take advantage of demand for chips that can power cars and turn everyday items into electronic tools.

The merger “combines two complementary businesses that should drive higher levels of growth,” Tore Svanberg, a San Francisco-based analyst at Stifel Financial Corp., wrote in a report on Monday. It “is transformative, both strategically and from a financial perspective.”

NXP estimates cost savings of $200 million in the first full year after the transaction is completed, with a clear path to an eventual $500 million of annual cost synergies. Even before accounting for those benefits, the deal will add to earnings immediately, according to data compiled by Bloomberg.

Chip Deals

The cash-and-stock purchase is the largest for a semiconductor company since the last time Freescale was acquired in a 2006 private-equity buyout and adds to about $70 billion of deals in the industry over the last three years.

“M&A in the industry has been creating shareholder value, and we suspect the same will be true here,” Mark Lipacis of Jefferies Group LLC wrote in a report on Monday.

NXP shares ended Monday at $99.56, up 17 percent, while Freescale rose 12 percent.

Freescale shareholders aren’t getting much of a premium relative to where the company was trading on Friday, though the offer -- valued at about $36.14 a share based on NXP’s share price at the end of last week -- is about 40 percent above the average stock price over the last three months. Competing bids are unlikely, Keith Moore, an event-driven analyst at MKM Partners in Stamford, Connecticut, said in a phone interview.

The private-equity firms that acquired Freescale in 2006 including Carlyle Group, TPG Capital and Blackstone Group still hold about 64 percent of the company.

Freescale’s revenue dropped more than 30 percent in 2009 as orders dried up amid the financial crisis, making it harder to service the debt used to fund the buyout and forcing the company to cut costs and raise cash. Results have since rebounded along with Freescale’s stock price.

“The sponsors may be (finally) ready to close the books on this one,” Stacy Rasgon, an analyst at Sanford C. Bernstein & Co., wrote in a report on Monday.