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NXP Assimilates Freescale’s High Power RF Capabilities to Retain Access to US DoD Opportunities

by Asif Anwar | Dec 22, 2015

NXP Semiconductors and Freescale Semiconductor agreed to merge operations earlier this year (March 02, 2015) in a deal that valued the combined company at over $40 billion. Revenues and profitability metrics were solid for both companies in their respective 2014 financial years:

  • NXP reported revenues of $5.64 billion in 2014, while Freescale had revenues of $4.63 billion in 2014, growing 17.3% and 10.7% respectively. NXP grew net earnings from $348 million to $539 million, while Freescale swung from a loss of $208 million in 2013 to show net earnings of $251 million.
  • Terms at the time dictated that Freescale shareholders would 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 implied 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 primary focus for the merger was on embedded, automotive, secure payments and Internet of Things markets with the NXP rationale behind the merger highlighting a number of key drivers::

  • Leverage the growth potential that will come from connectivity across the broader automotive, wireless communications and digital consumer segments underlined by NXP’s tagline “Secure Connections for a Smarter World”.
  • Establish NXP as the market leading supplier for automotive semiconductors and broad-based MCUs, while leveraging potential synergies across the NXP and Freescale portfolios.
  • The potential of $200 million in cost savings in the first year following the merger with future annual run rate cost synergies of $500 million expected.

The merger was officially completed on December 7, 2015 and the conference call and webcast to share information following close of the NXP and Freescale Semiconductor merger reaffirmed many of the key points that underscored the basic motivational tenets originally underscoring the merger.

Both companies had developed offerings to address the defense sector, and in 2013 Freescale had announced a renewed commitment to the defense sector targeting the US market in particular. These efforts were underpinned with the introduction of a new range of GaN RF power transistor products, as well as leveraging its portfolio of LDMOS RF power transistor and GaAs MMIC products, and packaging capabilities to meet current and future SWaP requirements in military communications, as well as radar, missile guidance and electronic warfare applications. Freescale introduced the MMRF5014H GaN-on-SiC transistor towards the back-end of 2014 leveraging what the company claimed was the industry’s highest thermal and wideband performance GaN device in its class.

It was clear that the combined high power RF business would run into anticompetitive issues as a result of the near monopoly that the new entity would have in place, so NXP would need to consider alternate options for its high power RF business.  

This led to decision to divest the NXP high power RF business, and the sale of this business to China-based Jianguang Asset Management Co. Ltd (“JAC Capital”) was also closed on the same day. The new company will operate as Ampleon and target high power RF applications including aerospace & defense and wireless infrastructure with a portfolio of Si LDMOS and GaN products.

This will allow NXP to effectively leverage the substantial semiconductor opportunity from global spending on defense systems (Strategy Analytics’ analysis forecasts spending on defense systems will approach $140 billion by 2023, with demand from North America accounting for 32% at this time). Retaining the Freescale RF power operations presented the best route for NXP as it can offer a US-based facility to address the ongoing US DoD opportunities.

The retention of Freescale means that NXP will continue with the strategy adopted by Freescale to address the military market opportunity. NXP’s former Freescale operations have been taking a slow but steady approach to addressing the military sector, taking opportunities to work directly with defense OEMs as well as offering its product portfolio through distributors such as Richardson. The two approaches have yielded good success with the operation boasting a solid opportunity pipeline that NXP expects will translate into revenues over the coming months.

Freescale launched six new products in 2015, and NXP expects to continue this momentum in 2016 with a focus on GaN as well as Si LDMOS with products that will address opportunities from applications that require higher frequency and/or higher power.

The high power RF operations will also be able to take advantage of NXP’s high performance SiGe technology. This would provide low noise performance capabilities which would allow NXP to target defense systems with a mixed technology offering taking advantage of the high power, wideband capabilities of GaN, for example, in combination with low noise highly integrated SiGe solutions on the receive side. Whether this will eventually lead to NXP moving up the value chain with IMA (integrated microwave assemblies) remains to be seen, but for now, NXP is positioned with a well-rounded portfolio of RF technologies that will allow the company to increase its penetration in the military sector into 2016 and beyond.

Thanks for reading...signing off for 2015 so Happy Holidays, Merry Christmas and best wishes for the New Year
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