NXP and Freescale Merging

The semiconductor industry continues to consolidate. Some mergers are stronger than others.  On March 1, 2015 it was announced that NXP and Freescale plan to combine forces.  Both companies have a significant presence in automotive and microcontrollers. Following this merger the new company would be the leader in automotive semiconductors and second in MCUs.  But does bigger mean better?

According to the NXP press release “Freescale shareholders will receive $6.25 in cash and 0.3521 of an NXP ordinary share for each Freescale common share held at the close of the transaction. The purchase price implies a total equity value for Freescale of approximately $11.8 billion.” If one were to include Freescale’s net debt, the total enterprise value is $16.7 billion. The transaction is expected to be completed by 2H 2015.

Both companies have comparable revenues. NXP’s gross revenues in 2014 were $5.6 billion while Freescale had $4.6 billion. The combined revenues are $10.2 billion.

How will this merger play out and will it be successful? This is a case of two companies that have been on the upswing.  Each has seen strong revenue growth in the last year. They have comparable revenues. However, Freescale has a large debt load.  The NXP press release makes the merger sound more like an acquisition by NXP, “Freescale shareholders will own approximately 32 percent of the combined company.”  A merger’s success will depend on how well management blends the two organizations together and not just the product portfolio.

There is always the question of will there be overlap and competition or complementary products? How can synergy be leveraged? Will this merger result in a stronger company?

Automotive is a large part of their portfolios. Freescale has one group dedicated to Automotive MCUs which accounts for roughly one quarter of its revenues. But a significant portion of its Analog and Sensors Group also sells into automotive.  In addition, some of the general purpose MCUs sell into automotive.  Thus, automotive would be over $1.6 billion for Freescale. NXP’s automotive group had over $1.1 billion sales in 2014. Presumably, some of NXP’s standard products likely sell into automotive.  Thus, combined there is close to $3 billion of automotive business.

Both companies offer analog and sensors for automotive, but many are not the same products. Freescale has MEMS while NXP does not. NXP has products for many sub-system functions but no automotive MCUs, while Freescale has a major focus on automotive MCUs.  Therein lies a good opportunity for synergy.

As noted, Freescale has MEMS and NXP does not. Most of Freescale’s MEMS business is in automotive.  The high growth for MEMS has been in cell phones. The consumer market and other applications associated with the Internet of Things (IoT) are expected to expand that growth trend. Freescale could benefit from a build up in its MEMS business in these markets. Though NXP does not have MEMS it has established a strong foothold with a sensor hub controller. The motion control sensor hub controllers in the Apple iPhone 5 and iPhone 6 are known as the M7 and M8 respectively.  These are standard off the shelf ARM based MCUs from NXP. As a new company it can market MEMS with the existing NXP sensor hub controllers.

Both companies are major suppliers of ARM-based MCUs. But Freescale also has ColdFire and the high performance Power architecture.  The Power architecture is the basis for most of Freescale’s networking and communications products. This is an area that NXP does not play.

One key point to keep in mind concerning MCUs is that Freescale’s Senior VP and GM of MCUs is Geoff Lees. He has been with Freescale since 2011. Prior to this Geoff Lees was VP and GM of MCUs at NXP. If anyone knows the MCU business of both NXP and Freescale it would be him. Since he joined Freescale, the portfolio of ARM based MCUs has expanded greatly.

A merger may mean that the MCU portfolio will be culled and pruned. But this will likely take a couple of years.  NXP and Freescale have similar ARM licenses but different implementations.  The MCUs are not drop in replacements.

Both Freescale and NXP have been actively targeting IoT. They will need to coordinate their marketing efforts. Security will become a more important element in IoT, including the connected vehicle. Both companies have security IP for MCUs. In addition NXP is a key player in smart cards.

It remains to be seen how successful this merger will be. There are some positive elements as noted. The combined company will have a great deal of talent and IP. Both have strong history in automotive. This is not a case of one or both parties having serious problems and need each other to prop themselves up. Both companies have been doing well.  Freescale has been reducing its debt.  This is the case of two companies looking to build on each other’s strength.  Semico believes the potential for the merged company is very positive.