Why NXP Semi's acquisition is a game changer
Look at NXP Semiconductors run! This stock was up 17 percent on Monday on news that it will acquire Freescale Semiconductor. Jim Cramer thinks this stock behavior is strange: Normally it's the target of the takeover that soars, not the acquirer!
Then again, this isn't a plain vanilla acquisition that hit the market. This one could breed a powerhouse, so it only makes sense that stocks wouldn't act like any old normal acquisition.
"Honestly, I think that NXP's acquisition of Freescale, for $11.8 billion in cash and stock, may be the best semiconductor merger yet. In fact, I think this deal could be a game changer," the "Mad Money" host said.
Cramer knows from past experience that consolidations in the semiconductor space have been very lucrative. This new NXP Freescale merger is no exception.
Currently, NXP is the 14th largest player in the semi space, and Freescale is the 18th largest. Combined, they will become the fourth largest, following Intel, Qualcomm and Texas Instruments. That's quite a jump!
The two companies were a match made in heaven, and Cramer sees enormous cross-selling opportunities. Currently, NXP is the top maker of semiconductors for infotainment and keyless ignition systems. Freescale is dominant in digital networking chips, radio frequency devices and sensors.
Put these companies together, and Cramer sees that they will dominate the auto market at a critical time when cars and things are rapidly becoming more connected.
On the flip side, NXP's debt load will increase dramatically from 1.7 times to 3 times EBITDA after the deal is completed. However, Cramer is not worried about this as he foresees that the company will generate significantly more cash flow. NXP anticipates it will be able to bring the balance sheet back to normal in a year and half.
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And while NXP's stock has had a dramatic move on Monday, Cramer thinks it is not done, yet. For those investors who are still daunted by the large move, Cramer recommended Harman International Industries. This is a company that makes the infotainment systems and is also in the heart of the connected car movement.
"I believe this NXP Freescale deal tops all of the others, creating a powerhouse that will dominate the connected car and the Internet of things, which is why I say NXP is still a buy."
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