Shares of NXP Semiconductors (NASDAQ:NXPI) surged to $100 per share following its announcement that it would acquire Freescale (UNKNOWN:FSL.DL) for nearly $12 billion. The stock is just under the $100 mark as of writing, but still near the all-time high it printed following the Freescale deal announcement. Should investors take the opportunity to sell NXP here, or should they hang on to their shares?
So, what's going on with that Freescale deal, anyhow?
According to NXP's press release, the acquisition is expected to make the combined entity into the No. 1 automotive semiconductor supplier as well as the No. 1 general purpose microcontroller vendor. The combination of the two companies is also expected to eventually lead to $500 million in "annual cost synergies," with $200 million in savings coming in the first year.
Much of the focus in the press release -- and in the press/analyst community -- has been on how the combined entity will be very well positioned in the automotive semiconductor market. According to a Jefferies analyst cited by the Wall Street Journal, the combined entity will have 13.7% market share in the automotive semiconductor market.
The good news is that in the semiconductor business, scale tends to be a good thing. Greater revenues often mean more leverage at suppliers, and a greater ability to invest in research and development for future products. Given that semiconductors are a highly technical business and chips only get more complex over time, the ability to outspend peers in research and development becomes a major competitive advantage.
At any rate, Wall Street seems quite positive on this deal, which NXP's CEO claims will help the company "significantly outgrow the market, drive world-class profitability and generate even more cash." Given that NXP's business has done extremely well over the years, I'd be inclined to think NXP's management team knows what it's doing by buying Freescale.
Is the stock a keeper?
Even though the Freescale deal was responsible for a significant move up, NXP's shares have been doing extremely well for quite some time. The company is relatively broad based, with its fingers in everything from secure connected devices to automotive. Even without Freescale, the company's opportunities already looked quite attractive and its business performance solid.
To illustrate, the company saw 17% revenue growth in 2014, which the company claims was over twice the semiconductor industry's growth. NXP also reported non-GAAP earnings-per-share growth by almost 45% from 2013 levels, and free cash flow was up an eye-popping 68%. This is a healthy business that's growing both the top line and the bottom line.
Interestingly enough, even after the Freescale-fueled big move up, the stock isn't terribly expensive at about 18.7 times 2015 normalized earnings estimates and about 15.4 times 2016 normalized estimates according to S&P Capital IQ. These are below-market multiples.
I'd say that NXP was probably worth owning even before the deal with Freescale. However, with the expected cost savings and scale advantages that the combined company will see, I'm even more confident that NXP shareholders could see the stock continue to do quite well into the future. Long-term investors probably shouldn't sell NXP here, even near all-time highs.