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Power chip maker ON Semiconductor Corporation to buy Fairchild in $2.4 billion deal

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Semiconductor Chip

Arizona-based ON Semiconductor Corporation is buying Fairchild Semiconductor International Inc. in a $2.4 billion deal to fortify its business of making power-management chips, another blockbuster acquisition in the rapidly consolidating semiconductor industry.

According to Thomson Reuters data, globally Semiconductor M&A has topped $80 billion so far this year, as companies want to reduce costs, meet the demand for cheaper chips and diversify portfolios.

According to ON Semiconductor Corporation, the deal creates a leader in the power semiconductor market with combined revenue of approximately $5 billion, spread across several markets with a strategic focus on automotive, industrial and smartphone end markets.

San Jose, CA, based Fairchild Semiconductor was founded in 1957. It develops products such as analog and mixed signal integrated circuits, automotive products, lighting integrated circuit, optoelectronics, and sensors for markets such as automotive, industrial automation, lighting, consumer goods, and wearable devices.

Fairchild's shares surged as much as 9.4 percent to $19.56, below the offer price of $20. ON Semiconductor Corporation’s shares declined by almost 11.3 percent. To fund this deal, the company plans to take on $2.4 billion in new debt, nearly tripling its debt load.

During the conference call, Chief Executive Officer of ON Semi, Keith Jackson said that there is little product and revenue overlap between both the companies. The combined company will have annual sales of $5 billion, and the revenue overlaps is expected to be below $100 million.

ON Semiconductor Corporation and its competitors' power-management circuits are used in everything from aircraft to home appliances and automobiles to computers.

Though an industry pioneer, Fairchild has been struggling to strengthen revenue growth recently due to slowing demand, which other chipmakers too are going through. This will result in further consolidation in the industry, according to Jackson.

The deals that have happened recently have spanned different sectors. Intel Corp. moved for Altera Corp. to reinforce its data center business, while Avago targeted Broadcom Corp. to further expand its wireless chip business.

Chinese company Tsinghua has spent more than $9.4 billion in the last couple of years, including the purchasing of stake in U.S. data storage company Western Digital Corp., and it also plans to invest $47 billion over the next five years.

BofA Merrill Lynch and Deutsche Bank are acting as the financial advisers of ON Semiconductor Corporation and Morrison & Foerster its legal adviser. Goldman Sachs is financial adviser to Fairchild and Wachtell, Lipton, Rosen & Katz is its legal counsel.

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