Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.
What: Shares of Freescale Semiconductor Ltd. (NYSE: FSL) jumped 11% Monday after the company announced it has agreed to merge with NXP Semiconductors (NASDAQ:NXPI). Shares of NXP also soared over 16% on the news.
So what: The merger will create a combined business valued at just over $40 billion with annual revenue of more than $10 billion. It also specifically places a total equity value on Freescale of approximately $11.8 billion (based on NXP's closing price on Friday), and a total enterprise value of roughly $16.7 billion including Freescale's net debt. For reference, as of this writing Freecale's total market capitalization sits at roughly $12.35 billion.
Under the agreement, Freescale shareholders will receive $6.25 in cash and 0.3521 of an ordinary share of NXP for each Freescale common share held at the close of the transaction, which is expected sometime in the second half of 2015. At that time, Freescale shareholders will own roughly 32% of the combined company.
The transaction is also expected to be accretive to both NXP's adjusted earnings and adjusted free cash flow, and NXP anticipates it will generate cost savings of $200 million in the first year after it closes. Over the longer term, NXP said it sees a "clear path to $500 million of annual cost synergies."
Now what: Freescale CEO Gregg Lowe added in a press release, "Our combined scale, size and global reach will position our new company to deliver sustainable above market growth. It will also serve to accelerate the strategic plans both companies have invested in, enabling us to deliver more complete solutions to customers."
Given the cash and partial shares Freescale investors are set to receive upon the deal closing, Freescale's share price will obviously be tied in part to the movements of NXP stock. In the meantime, however, given both the expected cost synergies and the promise of future growth by combining forces, I think investors in both companies are right to celebrate the merger.