NXP Semiconductor NV has announced a definitive agreement to acquire Freescale Semiconductor Ltd. in a deal valued at over $11bn. The two chip makers’ leadership in automotive helped them each post strong growth in annual sales last year. While the combined entity is well positioned with a promising revenue outlook, management is challenged with reducing a hefty debt.
Automotive (connected car) leadership driving growth
NXP and Freescale each enjoyed double-digit annual revenue growth in 2014, partly driven by strong sales in automotive. The vendors each attributed over 20% of 2014 revenue to sales of automotive chips, where both have been leaders for some time. The combined entity becomes the top automotive chip supplier, well positioned to support the expansion of the connected car to mid-range vehicles with infotainment, enhanced safety, and advanced driver assistance systems.
Both NXP and Freescale see an opportunity to support the Internet of Things (IoT) market. The two companies have a strong history in supplying microcontrollers, an important chip in the IoT ecosystem. NXP reports that the combined entity will be the world’s largest microcontroller supplier.
NXP also has strength in near-field communications (NFC), which it co-created with Sony. The chipset allows wireless digital data transfer by touching two devices. The technology is used by Google in Android and Samsung in smartphones, and it received a powerful endorsement when Apple included it in the iPhone 6.
The merger, however, does not erase a heavy debt burden. While the combined company is well situated to deliver over $10bn in annual revenue and has a capitalization of $40bn, its balance sheet carries nearly $10bn in debt. Management must therefore drive down the debt while continuing to innovate and bring new solutions to market. Given the deep history of the respective companies and their current position, they should be able to execute well.
Stay tuned as Ovum plans to release a number of reports on connected car components in the coming weeks.
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Daryl Inniss, Practice Leader, Components