Qualcomm to acquire NXP — here are 3 things you should know about this deal

Multinational semiconductor and telecommunications company, Qualcomm, is in talks to acquire semiconductor manufacturing giant, NXP. The deal would likely cost more than $30 billion, making it one of the largest for mergers and acquisitions. Below are three facts you should know about this tie-up, ranging from cutting costs to making inroads into one of the fastest changing industries today.

Slashing costs and creating efficiency

As with any deal, a major goal of the predicted merger is to drive down costs and create efficiency. According to industry executives, a more significant factor here is the rising costs of internal product development, as miniaturization makes chips more risky and expensive to design. Acquiring established products allows companies to expand without wasting money to design chips that don’t turn out to be successful. Becoming broader also allows chip makers to be more valuable suppliers to big customers, while making them difficult to displace by rivals.

Accelerating a consolidation rush in the semiconductor industry

Although it can take two to three months for the companies to strike an agreement, it’s likely that such a deal would accelerate a consolidation rush within the semiconductor industry. Shares of NXP, which is based in the Netherlands and trades on Nasdaq, escalated this past Thursday after The Wall Street Journal reported on the acquisition. It soared 17%, bringing the company’s market value to $33 billion. Not surprisingly, Qualcomm’s stock rose 6.3%, upping the company’s market value to $100 billion.

According to Deutsche Bank analyst, Ross Seymore, the average valuation for semiconductor deals since 2014 has been at about 25 times P/E with an average price premium of about 30%.

Propelling Qualcomm into the embedded and automotive markets

If all goes according to plan, the deal would expose Qualcomm to the embedded and automotive markets where it’s seeking inroads amid declining growth in its smartphone market. NXP was named the largest chip supplier to car makers, with a 14.2% share of the $27.4 billion automotive semiconductor market in 2015. Buying the Dutch company would make Qualcomm the number one supplier of chips used in cars — one of the hottest target markets for semiconductor makers.

Last year, NXP reported $6.1 billion in revenue and $1.5 billion in profit last year. Founded over 60 years ago as a division of Royal Philips NV, the company was sold to a private-equity consortium in 2006 and became public in 2010.