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Chip Maker Places A $12 Billion Bet On Smarter Cars

03/02/2015 | 07:25pm US/Eastern
   (FROM THE WALL STREET JOURNAL 3/3/15) 
   By Don Clark 

The race to build smarter cars is prompting another race -- to supply the chips that make those vehicles clever.

NXP Semiconductor Inc. stepped on the gas on Monday, agreeing to buy Texas-based Freescale Semiconductor Inc. in a cash-and-stock deal valued at about $11.8 billion. Both companies have strongholds in the automotive-chip market.

The purchase would vault Netherlands-based NXP to No. 1 supplier of chips for cars. Freescale currently ranks No. 4 and NXP No. 5 in that market, according to researcher Gartner Inc. The research firm estimated world-wide revenue for automotive chips at about $29.2 billion last year, up 9% from 2013.

That growth reflects an effort among auto makers to differentiate their offerings by using advanced electronics to handle everything from hands-free calling to parallel parking.

Newer cars incorporate as many as 100 chips controlling braking, dashboard displays, fuel injection and backup cameras. Gartner estimates that each new car sold last year contained about $334 of semiconductors, up from $223 in 2001. It projects that the total will reach $368 a car in 2018.

Much of this increasing demand is fueled by the rise in so-called connected cars, which use Wi-Fi internally and cellular connections to the outside world for features that include navigation, traffic information and assisted driving. Google Inc., Daimler AG, Ford Motor Co. and others are promoting the even more ambitious vision of cars that drive themselves, aided by video cameras, radar and sensor chips.

"The car is going to become a computer on wheels," said Jen-Hsun Huang, chief executive of chip maker Nvidia Inc., in a recent interview. "This is going to be a large business."

Nvidia, best-known for graphics chips that generate images for videogames, is currently offering a processor called the Tegra X1 for vision-related car applications. The company equates this chip's performance with that of a 2000-vintage supercomputer.

Other companies are trying to play bigger roles in the auto market, including Intel Corp., the largest supplier of chips for personal computers, and Qualcomm Inc., the top designer of wireless chips and processors for smartphones.

Entrenched players in the market historically located their operations near major clusters of auto makers. In Japan, the big domestic supplier is Renesas Electronics Corp., which currently sits atop Gartner's ranking for auto-chip suppliers. The company incorporates former operations of NEC Corp., Hitachi Ltd. and Mitsubishi Electric Corp.

In Europe, major suppliers include Infineon Technologies AG and STMicroelectronics NV, which also inherited long-standing chip-making operations. So did NXP, a former arm of Dutch electronics giant Philips NV, whose business dates to 1953.

NXP was spun off as part of a 2006 buyout and went public in 2010. It is known for chips used for car radios, in-vehicle communications, keyless entry and other security functions based on a technology called near-field communications, or NFC. The company reported $1.14 billion in revenue from automotive chips in 2014, up 12% from the prior year.

Freescale, the biggest U.S. supplier to the auto industry, is best known for simple processors called microcontrollers used in applications like car powertrains. Sales of microcontrollers for car applications totaled $1.89 billion in 2014, up 11.6% from the prior year, the company reported.

Richard Clemmer, NXP's chief executive, stressed that automotive applications are among many targets for the combined company, as more everyday products are enhanced with sensing and communications capabilities -- a trend Silicon Valley calls the Internet of Things.

But car makers have been among the first to jump on that bandwagon, he said, and they are now studying features to prevent onboard chips from getting hacked. "What we'll be able to do by putting these two companies together is to bring security to the car," Mr. Clemmer said.

Under the agreement, NXP will pay Freescale shareholders $6.25 in cash and 0.3521 of an NXP ordinary share for each Freescale common share. The Dutch company's share price has been boosted by success in getting NXP chips into devices, including Apple Inc.'s latest smartphones.

NXP's shares jumped 17% on Monday to $99.56 following the announcement. Freescale's stock, which had run up recently on reports of a possible buyout, rose about 12% to $40.36, both in New York trading. NXP had estimated the value of the deal at $36.14 a share before the rise in its stock on Monday.

---

Mike Ramsey contributed to this article.

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