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ON Semiconductor Is Buying Fairchild to Head Off Competition

November 18, 2015

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Semiconductor wafersPhotograph by Will & Deni McIntyre — Getty Images/Photo Researchers RM

ON Semiconductor (ON) is buying Fairchild Semiconductor (FCS) 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) has said it has no M&A plans for now, Infineon’s 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, 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.

ON Semi 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, CEO 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 (INTC) moved for Altera (ALTR) to boost its data center business, while Avago (AVGO) targeted Broadcom (BRCM) to expand its wireless chip business.