ON Semiconductor to Acquire Fairchild for $2.4 Billion Cash

Yesterday, ON Semiconductor Corp. ON announced its plan to take over Fairchild Semiconductor International Inc. FCS for $2.4 billion in an all-cash deal. This is the latest deal to be announced in a quickly consolidating industry.

The Deal

Per the definitive agreement, ON Semiconductor will pay $20.00 for each share of Fairchild.

The deal is being financed by a new loan, and ON Semiconductor expects to have enough funding for operations.

Although the boards at both the companies have unanimously approved the transaction, it is subject to shareholder and regulatory approval.

If all goes well, the deal is expected to close in the second quarter of 2016.

Expected Synergies

The acquisition will lead to the creation of a leader in the power semiconductor space with combined revenues of roughly $5 billion, diversified across manifold markets with a planned focus on smartphone, automotive and industrial end markets.

ON Semiconductor CEO Keith Jackson said, "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."

This transaction is projected to be instantly accretive to ON Semiconductor's earnings and free cash flow. The company also expects to achieve yearly cost savings of $150 million within 18 months of deal closure.

According to Reuters, this deal will help ON Semiconductor counter competitors, especially China's Tsinghua Unigroup Ltd which aspires to be the world's third largest chipmaker.

In fact, FBR's Christopher Rolland is of the opinion that Tsinghua would "probably be top of the list" of firms that ON Semiconductor's move aimed to put a stop to.

Shares React

According to the Motley Fool, following the news, Fairchild shares gained roughly 9%, on the brink of the final buyout price. However, shares went down 9% later in the trading session.

Considering that Fairchild's market cap is roughly $2 billion and that of ON Semiconductor is approx $4 billion, this announcement damaged more investor value than it created.

In the End

According to Gartner, worldwide semiconductor revenues in 2015 are predicted to decline 0.8% to $337.8 billion from the 2014 level. This marks a major revenue decline since 2012 when the market dwindled 2.6%. Previously, the research firm predicted 2.2% growth.

Global economic headwinds, like the slowing Chinese economy and the strong dollar, are increasing the cost of electronic equipment in regions like Western Europe and Japan. This, in turn, is lowering sales while encouraging buyers to shift to low-cost equipment in these markets.

In fact, over the past year, slowing growth and rising costs led to major deals in the chip industry. According to Thomson Reuter data, so far in 2015, chip companies have spent more than $80.0 billion on mergers and acquisitions, already exceeding the $37.7 billion for deals announced in 2014.

Significant acquisitions include, Avago–Broadcom BRCM, Intel INTC–Altera and Freescale–NXP Semiconductors.

Considering the overall scenario of the semiconductor market, ON semiconductor's merger with Fairchild looks justified.

ON Semiconductor currently holds a Zacks Rank #4 (Sell).

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