What happened

Shares of Cypress Semiconductor (CY) have surged today, up by 24% as of 11:40 a.m. EDT, after the company announced a deal to be acquired by Infineon (IFNNY 2.44%). Infineon stock fell on the news as investors expressed skepticism.

So what

Infineon has agreed to acquire Cypress for $23.85 per share in cash, representing a 46% premium to Cypress' 30-day volume-weighted average price. That price pegs Cypress' enterprise value at 9 billion euros ($10.1 billion), and Infineon will fund 30% of the transaction with equity, with the remainder being financed with debt and cash on hand. Infineon says it is "committed" to keeping its investment grade credit rating while also maintaining a strategic cash reserve. Cypress will continue to pay its quarterly dividends until the transaction closes.

Infineon logo plus Cypress logo

Image source: Infineon.

"The Cypress team is excited to join forces with Infineon to capitalize on the multi-billion dollar opportunities from the massive rise in connectivity and computing requirements of the next technology waves," Cypress CEO Hassane El-Khoury said in a statement. "This announcement is not only a testament to the strength of our team in delivering industry-leading solutions worldwide, but also to what can be realized from uniting our two great companies."

Now what

The companies argue that merging will better position the combined entity in high-growth markets. Cypress' product portfolio, which includes microcontrollers and other connectivity components, is highly complementary to Infineon's offerings. Infineon also believes that it can achieve "significant economies of scale" through the acquisition, and the combined company will be the eighth-largest chip manufacturer in the world.

The deal is expected to be accretive to earnings in the first full fiscal year after closing, and free cash flow margin should expand as the business becomes less capital-intense. Infineon expects to generate cost synergies of 180 million euros ($201.7 million) per year by 2022. Revenue synergies are estimated at over 1.5 billion euros ($1.7 billion) in the "long term."

Cypress shareholders and regulators will need to approve the deal, which is expected to close by the end of 2019 or early 2020.