ON Semiconductor to Buy Fairchild for $2.4 Billion in Cash

19 Nov 2015 | Author: | No comments yet »

Chip-Industry Merger Bash: Why This Party Isn’t Over.

A month ago, Fairchild Semiconductor shares in a single day. ON Semiconductor Corp is to buy Fairchild Semiconductor International Inc for $2.4 billion to bolster its business of making power-management chips, the latest in a rapidly consolidating industry. Semiconductor M&A globally has topped $80 billion so far this year, according to Thomson Reuters data, as companies seek to cut costs, meet demand for cheaper chips and diversify portfolios. Our plan is to bring together two companies with complementary product lines to offer customers the full spectrum of high, medium and low voltage products. In fact, this year has seen 14 deals above $1 billion in value so far, including Avago’s record-busting pickup of Broadcom BRCM 1.82 % for $37 billion.

While ON Semi rival STMicroelectronics has said it has no M&A plans for now, Infineon’s acquisition of International Rectifier in January was the most recent deal that posed a direct competitive threat for ON Semi. The immediate EPS accretion and potential to significantly augment ON Semiconductor’s free cash flow, make the Fairchild acquisition an excellent opportunity for ON Semiconductor stockholders.

In a somewhat convoluted financing maneuver, the $2.4 billion deal will be financed by cash from both Fairchild’s and ON’s balance sheets plus $2.4 billion of new debt. Analysts said ON Semi’s move for Fairchild was most likely to keep it out of the hands of a competitor, including China’s Tsinghua Unigroup Ltd, which aims to be the world’s No.3 chipmaker. I would note that shares of analog chip makers are rising on this deal: Analog Devices (ADI) shares are up 14 cents at $59.44; Maxim Integrated Products (MXIM) is up 31 cents, or 0.8%, at $39; and Texas Instruments (TXN) is up 4 cents at $57.11.

Since the deal is structured as a tender offer at $20 per Fairchild share, I suppose ON’s $560 million of cash reserves and Fairchild’s $240 million will be used to buy back the early waves of accepted offers, with the new debt filling the later rounds and replenishing the combined company’s balance sheet to roughly $800 million of spare cash. The two companies work in closely related markets, both extracting the lion’s share of their revenues from chips that control and adjust power flows.ON’s largest market is the automotive industry, representing 31% of the company’s third-quarter sales. Qualcomm, QCOM -9.40 % with about $20 billion in net cash and a pressing need to diversify from its dependence on modem chips for smartphones, just hired a former stock analyst to run M&A for the company. The combined company will have annual revenue of $5 billion, with revenue overlap of less than $100 million and little product overlap, said Keith Jackson, chief executive of ON Semi, which had revenue of $3.16 billion in 2014.

Fairchild, an industry pioneer, has been struggling to boost revenue growth recently due to slowing demand – a story not too different from that of other chipmakers. Recent deals have spanned various sectors: Intel Corp moved for Altera Corp to boost its data center business, while Avago targeted Broadcom Corp to expand its wireless chip business. Doing the math on Fairchild’s roughly $2 billion market cap and ON’s $4 billion market value, this announcement destroyed more investor value than it created. The chairman of Tsinghua Unigroup, a state-owned entity based in China, told Reuters earlier this week that the company plans to spend the equivalent of $47 billion over the next five years to build up its chip business.

The group reportedly made a bid for Micron earlier this year in the $23 billion range, but that price appears to have been insufficient to lure the memory chip maker to the table. The PHLX Semiconductor Index is still down about 4% for the year, and currently trades at a forward price/earnings multiple that is around its five-year average.

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