ON Semiconductor Corp (ON.O) is to buy Fairchild Semiconductor International Inc FCS.O for $2.4 billion to bolster its business of making power-management chips, the latest in a rapidly consolidating industry.
Semiconductor M&A globally has topped $80 billion so far this year, according to Thomson Reuters data, as companies seek to cut costs, meet demand for cheaper chips and diversify portfolios.
While ON Semi rival STMicroelectronics (STM.PA) has said it has no M&A plans for now, Infineon's (IFXGn.DE) acquisition of International Rectifier in January was the most recent deal that posed a direct competitive threat for ON Semi.
Analysts said ON Semi's move for Fairchild was most likely to keep it out of the hands of a competitor, including China's Tsinghua Unigroup Ltd, which aims to be the world's No.3 chipmaker.
FBR's Christopher Rolland said Tsinghua would "probably be top of the list" of firms that ON Semi's move aimed to thwart.
Fairchild's shares rose as much as 9.4 percent to $19.56, below the offer price of $20. ON Semi's shares fell as much as 11.3 percent. The company plans to take on $2.4 billion in new debt to fund the deal, nearly tripling its debt load.
The combined company will have annual revenue of $5 billion, with revenue overlap of less than $100 million and little product overlap, said Keith Jackson, chief executive of ON Semi, which had revenue of $3.16 billion in 2014.
ON Semi and its rivals' power-management circuits are used in everything from aircraft to home appliances and automobiles to computers.
Fairchild, an industry pioneer, has been struggling to boost revenue growth recently due to slowing demand – a story not too different from that of other chipmakers.
Jackson said it was "inevitable" there would be further consolidation in the industry.
Recent deals have spanned various sectors: Intel Corp (INTC.O) moved for Altera Corp ALTR.O to boost its data center business, while Avago (AVGO.O) targeted Broadcom Corp BRCM.O to expand its wireless chip business.
China's Tsinghua has spent more than $9.4 billion in two years, including on buying a stake in U.S. data storage company Western Digital Corp (WDC.O), and it plans to invest $47 billion over the next five years.
Tsinghua's chairman told Reuters on Monday the state-backed firm was in talks with a U.S.-based company involved in the chip industry.
Deutsche Bank and BofA Merrill Lynch are ON Semi's financial advisers and Morrison & Foerster its legal adviser. Goldman Sachs is advising Fairchild and Wachtell, Lipton, Rosen & Katz is its legal counsel.
(Reporting by Devika Krishna Kumar and Lehar Maan in Bengaluru; Editing by Anil D'Silva and Savio D'Souza)