Get used to hearing the term IoT — aka the Internet of Things.
That is what is behind the latest merger between NXP Semiconductors NV (NASDAQ:NXPI) and Freescale Semiconductor Ltd (NYSE:FSL). Netherlands-based NXPI has purchased FSL in a $11.8 billion deal that is part cash, part debt and part stock.
Both companies share a common interest in the automotive sector, developing chips and sensors for major global manufacturers.
Both come from similar backgrounds as the semiconductor arms of large electronics firms. NXP was spun off from electronics giant Koninklijke Philips NV (PHG). Freescale was spun off from Motorola Solutions Inc (NYSE:MSI).
But the paths diverge there. NXP has been growing quickly as it expanded its market into mobile communications, cybersecurity, the connected car and IoT. Having a largely industrial clientele, NXP is helping build the structures that appeal to consumers and businesses down the line — sensors for washers and dryers, networked cars, secure communications among devices, etc.
Freescale has been having troubles as of late, and its challenges are somewhat indicative of the new phase in semiconductor companies.
Where diversity was a very compelling for decades. You could pick and choose a specialty chip company to produce what you needed for your device; now volume is becoming more of an issue. Certain technologies are available across all chip platforms, and they’re all running extremely fast. So, the ‘custom’ aspect is less important than being able to stick the chips in everything.
This is big push for market players like Intel Corporation (NASDAQ:INTC) and Texas Instruments Incorporated (NASDAQ:TXN).
There are about 300 semiconductor companies globally as this point, and last year, there was about 4% consolidation of the semiconductor sector. Industry expert Christopher Rolland of FBR Capital Markets expects that trend to accelerate to 5% – 6% in 2015.
Since NXP and Freescale both work in the auto space, it’s likely that’s going to be a focus of this deal — to be able to scale up that business and continue its double-digit growth. Plus, cutting out the management of FSL as well as other redundant aspects of the businesses will result in cost savings.
There are projections out of some automakers that, in coming years, they will be spending more on sensors and computers than on steel. That puts this deal between NXP and Freescale in real perspective.
Part of what made this deal between NXP and Freescale possible was the home-run NXPI hit when it landed the security contract for Apple Inc.‘s (NASDAQ:AAPL) ApplePay, which is one of the big reasons the mobile division is growing at a 40% clip.
The NXP and FSL acquisition is a deal of scale and will put NXP almost at the same size as Texas Instruments when all is said and done. Plus, NXPI has a growth trajectory that is even more impressive than TXN.
The deal has also given NXPI stock more room to run from here, and many analysts are already upgrading NXPI stock.
The only concern here is that all this enthusiasm has pushed NXPI stock to overbought territory in the near term, and you won’t be getting NXPI at the best price. But, if you’re interested in a long-term investment here, a couple extra dollars will not spoil the ride.
Louis Navellier is a renowned growth investor. He is the editor of five investing newsletters: Blue Chip Growth, Emerging Growth, Ultimate Growth, Family Trust and Platinum Growth. His most popular service, Blue Chip Growth, has a track record of beating the market 3:1 over the last 14 years. He uses a combination of quantitative and fundamental analysis to identify market-beating stocks. Mr. Navellier has made his proven formula accessible to investors via his free, online stock rating tool, PortfolioGrader.com. Louis Navellier may hold some of the aforementioned securities in one or more of his newsletters.
