Yahoo Finance Merger Guides ON and Fairchild Stocks in Opposite Directions
Fairchild-ON Merger: Do Leverage and Synergies Balance It Out?
The ON-FCS merger
In this series, we’ve seen that ON Semiconductor (ON) and FCS Semiconductor (FCS) have complementary product portfolios and serve the same end markets and customers. The merger of the two would bring cost and revenue synergies but at the cost of high leverage. The deal seems very expensive since ON has the potential to grow organically and doesn’t have to opt for a costly acquisition.
Let’s see now how investors have reacted to the merger idea since the merger agreement was signed in November 2015.
Stock price movement during merger talks
When the merger was announced on November 18, 2015, the stocks of the two companies moved in opposite directions. ON fell 7.9%, and FCS rose 8.5%. FCS stock was trading at $19.40, nearly double the price of ON stock that was trading at $9.89.
The two stocks moved in opposite directions again on December 8, 2015. ON shares fell 6.9%, and FCS shares rose 5.6%. This was because an unnamed Chinese (MCHI) investor made a better proposal to acquire FCS for $21.70 per share against ON’s offer of $20 per share. From December 8, 2015, through February 15, 2016, ON’s shares fell more than 30% due to uncertainty surrounding the deal.
On February 16, 2016, FCS declined the Chinese offer and went ahead with the merger agreement with ON. This saw ON’s shares rise 6.2% and FCS’s shares fall 2.9%. From February 16 to the present, ON shares have risen 22.6% and are currently hovering around $9 or more.
Comparing ON’s stock with its peers
ON has a market capitalization of $3.8 billion and a PE (price-to-earnings) ratio of 19.07x. This indicates that the stock price is 19 times the EPS (earnings per share). It has a price-to-EBITDA (earnings before interest, tax, depreciation, and amortization) ratio of 6.40x. The difference between the two ratios indicates a higher interest burden.
This is evident when we compare the ratios with its peers. Texas Instruments (TXN) has a PE ratio of 19.19x and a price-to-EBITDA ratio of 11.06x. NXP Semiconductors (NXPI), which recently merged with Freescale, has a PE ratio of 52.67x and a price-to-EBITDA ratio of 9.92x. This indicates a higher interest burden coming from the debt NXP took to fund the merger.
After the merger, ON would have a high PE ratio and a low price-to-EBITDA ratio. The next earnings season will most likely show the first earnings of the combined company. We’ll have a better idea then of how well the new company plays the merger’s synergies and leverage.
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