ON Semiconductor to Buy Fairchild for $2.4 Billion in Cash

Updated on
  • Latest deal in industry that's seen over $90 billion in M&A
  • ON expects $150 million in annual cost savings from deal

ON Semiconductor Corp. agreed to buy Fairchild Semiconductor International Inc. for $2.4 billion, the latest in a spate of more than $90 billion of deals in the global chip industry in the past year as companies combine in the face of rising production costs.

ON will pay $20 a share in cash for Fairchild, a 12 percent premium to the stock’s close in New York on Tuesday. The price is 41 percent above Fairchild’s closing level Oct. 13, the day before reports that the company was seeking a buyer. Fairchild, based in San Jose, California, makes semiconductors that regulate power in electronics, chips for cars and electronic signal converters. The company has annual revenue that’s about 1/10 of Texas Instruments Inc., the biggest maker of such products.

ON edged out Infineon Technologies AG, which had been said to be the front-runner earlier this month because it was thought to be willing to pay more, people with knowledge of the matter said. STMicroelectronics NV also explored an acquisition of Fairchild, but said on an earnings call in October that it had no plan to make an offer.

“There are other players that could potentially be interested,” said Steve Smigie, an analyst at Raymond James & Associates who rates ON outperform. “You could see STMicroelectronics or Infineon come back with an offer as well,” Smigie said. “It’s become a game of scale.”

Merger Boom

ON’s takeover of Fairchild takes the value of semiconductor mergers and acquisitions proposed over the past 12 months to $91.7 billion, according to data compiled by Bloomberg. And the action isn’t over yet. Microsemi Corp. is aggressively bidding for PMC-Sierra Inc. and raised its offer for a second time Wednesday as it seeks to top an offer by Skyworks Solutions Inc.

“The industry has matured a lot,” Smigie said. “There’s not as much growth as there used to be, so the companies are looking for new ways to generate value for shareholders. In this environment, with very low interest rates, it’s easy to get cheap financing, so that makes the potential for M&A much higher.”

Combining ON and Fairchild will create a company of almost $5 billion in annual sales with Phoenix-based ON expecting to save $150 million a year within 18 months of the deal closing, the companies said.

ON fell 7.9 percent to $9.89 at the close in New York, leaving it down 2.4 percent this year. Fairchild jumped 8.5 percent to $19.40, and has gained 15 percent in 2015.

Deutsche Bank AG, which is the lead adviser to ON Semiconductor, and Bank of America Corp., which is also a financial adviser, will both provide committed debt financing for the merger. Goldman Sachs Group Inc. was adviser to Fairchild.