NXP-Freescale merger makes 'true powerhouse': CEO

NXP Semiconductors' acquisition of Freescale Semiconductor will create "a true powerhouse" in the segment, NXP CEO Rick Clemmer said on Monday.

"It's a consolidating industry, and I think it's only natural that the industry continues to consolidate," Clemmer said in an interview on CNBC's "Squawk on the Street."

The chipmaker agreed to buy Freescale, its smaller peer, and merge operations in a deal valuing the combined company at over $40 billion.

The deal, announced by the pair late on Sunday and first reported by Reuters, will make the business the industry leader within the auto and industrial semiconductor markets.

NXP and Freescale shares were trading about 16 and 11 percent higher, respectively, on Monday morning.

NXP will aim for $200 million in cost synergies for its first year and shoot for $500 million after that, Clemmer said. He added that the merger creates an opportunity to "significantly increase" NXP's revenue.

Pascal Pavani | AFP | Getty Images

The transaction is the clearest sign yet that semiconductor companies are regaining the confidence required to pursue big mergers and acquisitions at a time when their major clients, such as mobile phone manufacturers, seek to consolidate suppliers. Freescale also has its chips in consumer products such as Amazon's Kindle e-reader.

The deal is the fourth semiconductor sector M&A deal this year, and the biggest of those by far.

Last month, Avago Technologies said it would buy wireless networking company Emulex for more than $600 million, while MaxLinear said it would buy Entropic Communications for $287 million. In January, Lattice Semiconductor said it would buy Silicon Image for $600 million.

"Financially this deal make sense. By being bigger, you limit the impact of the product cycles and volatile end markets," said RBC analyst Doug Freedman.

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Freescale shareholders will receive $6.25 in cash and 0.3521 of an NXP share for each Freescale share. The purchase price puts Freescale's value at $11.8 billion, with a total enterprise value of $16.7 billion including debt.

The companies expect the deal to close in the second half this year. NXP will fund the transaction with $1 billion of cash from its balance sheet, $1 billion of new debt and about 115 million of its shares. Freescale shareholders will own about 32 percent of the combined company.

Based in Eindhoven, Netherlands, NXP has operations in more than 25 countries and had revenue of $5.7 billion in 2014. Austin, Texas-based Freescale also has operations in more than 25 countries and had net sales of $4.6 billion in 2014.

NXP's portable device and computer business is growing quickly, with its revenue up 46 percent year-on-year to $712 million in 2014. But its bigger automotive and chip identification businesses, which together account for about half of its revenue, grew by only 12 to 13 percent.

Freescale reported adjusted earnings of $1.1 billion in 2014, up from $893 million a year earlier.

Freescale went public in 2011 after being taken private in 2006 for $17.6 billion in a leveraged buyout by a group of private equity firms that included Blackstone Group, Carlyle Group, Permira Advisers and TPG Capital. The buyout firms still own 64 percent of Freescale.