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How ON Plans to Improve Its Profitability through the Fairchild Merger

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ON looks to improve its operating margin to 17%–19%

In the previous part of this series, we saw that ON Semiconductor (ON) plans to improve its operating margin by realizing synergies from the Fairchild Semiconductor merger. ON’s operating margins are lower than its rivals due to weakness in the macroeconomic environment and the semiconductor industry.

The company now looks to achieve its target operating margin of 17%–19% by leveraging the benefits from the integration of Fairchild Semiconductor.

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How does ON plan to improve its operating margin?

The combination of ON Semiconductor (ON) and Fairchild Semiconductor has created the world’s largest supplier of power management solutions. The combined company has a larger revenue base, which would help it leverage its operating expenses and improve its margin. Let’s see how ON plans to do this.

  • Both ON and Fairchild Semiconductor spend on R&D (research and development) of products catering to similar end markets of automotive, industrial, and communications. ON plans to combine these efforts and realize R&D savings.
  • Both companies cater to the same markets but have little customer overlap. ON plans to merge the selling efforts of the two companies and cross-sell the complementary products to the diverse customer base. This would eliminate duplicate efforts and generate more sales.
  • ON expects to complete the integration of IT and systems by the end of fiscal 2017 and start realizing these synergies in fiscal 2018.

With these efforts, ON looks to generate $160 million in cost synergies in 2017, $200 million in 2018, and $225 million in 2019. The company expects to save $130 million in operating costs and $30 million in the cost of goods sold by 2Q18.

Peers

Similar synergies are expected to be realized by Qualcomm (QCOM) after it integrates NXP Semiconductors (NXPI). Although the two companies have little overlap in products and customers, they have a complementary portfolio that would help the combined company leverage its operating expenses to cater to a larger market.

Next, we’ll look at the company’s end markets and how the Fairchild Semiconductor merger has changed ON’s position in each of these markets. You can gain exposure to ON’s peers through the PowerShares QQQ ETF (QQQ), which has ~11.1% holdings in semiconductor stocks and ~1.4% exposure in QCOM.

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