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The Freescale–NXP merger: A large deal in the semiconductor space

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Merger spread analysis

To perform merger arbitrage, the investor will generally buy the stock of the company being acquired, sell short the relevant ratio of the acquirer’s stock (if applicable) and wait for the deal to close. When the merger is completed, the investor will exchange the stock of the company being acquired for the deal consideration.

The Freescale–NXP merger is a cash and stock transaction that will see Freescale Semiconductor (FSL) shareholders receive $6.25 in cash plus .3521 shares of NXP Semiconductors (NXPI).

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This deal is about the timing and the process

The key to the Freescale–NXP merger is the timing. The companies are guiding to a 2H15 close. On the conference call, management said it would take at least two quarters, so we’re probably looking at a 4Q closing.

The deal was a low premium to the current share price, indicating NXP may have gotten a sweet deal. NXP stock rallied hard on the announcement. Freescale shareholders will of course participate in the merged entity, however there were questions about the sale process. Freescale didn’t comment on these questions.

One thing to note is that the merger agreement specifies that the deal needs to be reviewed according to the provisions of the HartScott-Rodino Antitrust Improvements Act as well as by the European Union and China.

There is a marketing period of up to 15 days after the deal closes for the bankers to syndicate out the debt. These are not typically used, but the buyer can use them if necessary.

Other merger arbitrage resources

Other important merger spreads include the Hospira–Pfizer deal. The Hospira (HSP) and Pfizer (PFE) merger is also set to close in 2H15. For a primer on risk arbitrage investing, read Merger arbitrage must-knows: A key guide for investors.

Investors who are interested in trading in the semiconductor space should look at the VanEck Vectors Semiconductor ETF (SMH).

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