Mergers always create some uncertainty in the supply chain. When two suppliers come together, such as NXP Semiconductors N.V. (NASDAQ: NXPI) and Freescale Semiconductor, Ltd., it’s usually a positive for buyers. Instead of dealing with two vendors, purchasing is now dealing with one. The same is true for distribution partners – most of the time.
The consolidation of semiconductor vendors Freescale and NXP is so far being greeted positively by the companies’ distributors. Richard Clemmer, NXP's Chief Executive Officer, yesterday said he had already heard from several of NXP's channel partners. "They are really excited by the opportunity created and how we can work together to even grow faster," he told analysts during a conference call. Both companies have been increasing their presence in the channel and the combination will make for an even stronger distribution partner, Clemmer added.
The merged entity – a $40 billion company -- will become the market leader in automotive semiconductor solutions and the market leader in general purpose microcontroller (MCU) products, executives said. NXP and Freescale plan to cross-sell their product portfolios as soon as the deal is done. One exception to that plan will be NXP's high-performance RF products: NXP said it will divest that business in order to avoid product overlap and possible regulatory issues. And it doesn't appear that chip production will suffer any hiccups: the merged companies don't foresee any plant closures as a result of the consolidation.
Most of the industry’s leading distributors carry both Freescale and NXP. Historically, if a distributor did not carry both lines several things could happen. The distributor could gain access to all products under the existing franchise. The other possibility is the entire relationship could be terminated. This used to happen in the case of a conflict: when one supplier refused to be sold alongside another. This practice of not sharing shelf has largely gone by the wayside.
Avnet Inc., which carries both lines, anticipates a number of benefits from the merger. “From a product portfolio standpoint, it looks like there’s a lot of synergies in the microcontroller world: NXP brings standard products to the party and Freescale—which was spun out of Motorola – they were the higher-end player,” said Alex Iuorio, senior vice president, supplier management and business development for Avnet Electronics Marketing Americas. “The combination manifests itself in some really cool powerful processor products. There is some overlap as it relates to their ARM products and MCUs as well as peripherals – I would love to be the architect of selecting the best of the best [of that offering]. The one thing that first jumped out at me was how to rationalize the power business—the announcement that they intend to sell the NXP portion and rely on Freescale’s product portfolio – hit that right from the outset.”
Like their semiconductor vendors, distributors benefit from economies of scale. Establishing and maintaining relationships with suppliers require investment by distributors. Distributors train their sales staff on products; purchase and maintain inventory; break down lots and build kits; market their suppliers' products and often manage customers' logistics. Now, distributors can expect to consolidate purchases from Freescale and NXP; generate savings associated with high-volume purchases; and sell a broader product line through their existing salesforce. “I don’t see any downside,” said Iuorio. “They’ll represent a broader product portfolio and when you balance that against the customer base and the continual move toward consolidated vendors—that fulfills the customer charter as well. Nothing leads me to believe this [merger] won’t be anything except a really cool deal.”
In particular, the product portfolio targeting the Internet of Things (IoT) – or as NXP calls it, the Smarter World—is compelling. “The combination of NXP and Freescale creates an industry powerhouse focused on the high growth opportunities in the Smarter World. We fully expect to continue to significantly out-grow the overall market, drive world-class profitability and generate even more cash, which taken together will maximize value for both Freescale and NXP shareholders,” said Clemmer.
“Our combined scale, size and global reach will position our new company to deliver sustainable above market growth,” said Gregg Lowe, Freescale Semiconductor President and Chief Executive Officer. NXP anticipates achieving cost savings of $200 million in the first full year after closing the transaction, with a clear path to $500 million of annual cost synergies.
Under the terms of the agreement, 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 (based on NXP's closing stock price as of February 27, 2015) and a total enterprise value of approximately $16.7 billion including Freescale's net debt.
The transaction has been unanimously approved by the boards of directors of both companies and is subject to regulatory approvals in various jurisdictions and customary closing conditions, as well as the approval of NXP and Freescale shareholders.
The transaction is expected to close in the second half of calendar 2015.