PARIS STMicroelectronics (STM.PA) and NXP NXP.UL will merge their wireless chip businesses into a $3 billion joint venture controlled by STMicro to better challenge market leaders Qualcomm (QCOM.O) and Texas Instruments TXN.N.
STMicro said it would pay NXP $1.55 billion to own 80 percent of the venture -- a first sign of consolidation that had been expected in order to combat falling prices and spread high industry research and development costs.
"This deal is about creating scale in a market with too many players," STMicro Chief Executive Carlo Bozotti told reporters and analysts on a conference call after the two companies announced the deal on Thursday.
The merger combines the world's third- and fourth-biggest wireless chipmakers, which combined had about 10 percent of the global market in 2007, according to iSuppli. Qualcomm had about 18 percent and Texas Instruments had roughly 16 percent.
STMicro and NXP said they would have 14 percent of the market.
STMicro's New York-traded shares (STM.N) were down 8 cents $11.15. The Philadelphia Semiconductor Index .SOXX was up almost 2 percent, Qualcomm was up 2.6 percent, and smaller rival Broadcom BRCM.O was up 3 percent.
Some analysts said STMicro, which makes chips for third-generation phones with high-speed Web links, may have overpaid for the NXP business, which sells chips for second-generation phones with slower Web connections.
"My first-blush reaction is that it looks like a lot of money. But on the flip side, it's a positive that we're consolidating the industry," said American Technology Research analyst Doug Freedman.
Another analyst, John Dryden of Charter Equity Research, said STMicro was "taking on increased exposure to a declining and highly competitive market" rather than expanding its share of the wireless chip business.
The wireless units of NXP and STMicro, Europe's biggest chipmaker, had combined sales of $3 billion and operating profit of about $200 million in 2007.
The joint venture will count Nokia NOK1V.HE, Samsung (005930.KS) and Sony Ericsson (6758.T)(ERICb.ST) among its customers. Nokia got out of the semiconductor business last year and gave STMicro a head start in licensing its wireless technology.
STMicro and NXP said they expect to generate annual savings of over $250 million by 2011, and STMicro said it expects the transaction to add to its non-GAAP cash earnings per share in 2009.
The deal is expected to close in the third quarter of this year, they said.
The transaction will allow STMicro to diminish its cash pile, which was $3.5 billion at the end of 2007, and strengthen the cash position of NXP, which a consortium led by Kohlberg Kravis Roberts KKR.UL bought from Philips (PHG.AS) in 2006.
STMicro will appoint the chief executive of the combined unit and NXP the chief financial officer. Bozotti will be chairman of the five-strong board, of which three members will come from STMicro and two from NXP.
NXP Chief Executive Frans van Houten, who will sit on the board, told Reuters in a January interview he did not rule out an exit from wireless chips.
The deal includes put and call options for NXP to exit its 20 percent stake starting three years from the formation of the venture.
Francis Sideco, an analyst for iSuppli, said the wireless chip market, where competitors need to spend about 20 percent of revenue on research and development, has room to consolidate further.
"There's probably space for maybe four or five big guys in this space, and at last count we were closer to twelve," said Sideco, who sees only companies with annual revenue of $1 billion or more surviving in the wireless chip market.
"That loosely translates to a decent amount of scale to compete in the R&D race, and at that level you'll probably have enough volume so you can keep your costs down and get a decent amount of margin," he said.
Nokia, STMicro's biggest customer, said the deal was a good thing for the handset industry.
"We welcome the emergence of this joint venture creating a strong player serving the top mobile phone manufacturers, understanding the needs of these customers and providing the required speed of innovation," Nokia's head of sourcing and procurement, Jean-Francois Baril, said in a statement.
(Additional reporting by Sinead Carew in New York; writing by
Georgina Prodhan; editing by Rory Channing, Paul Bolding, John Wallace)