Will the STM/NXP Semiconductors Merger Consolidate 3G?

Last week, STMicroelectronics (STM) and NXP Semiconductors announced that they were going to combine their wireless chip manufacturing capabilities to form a joint venture. This is an industry consolidating event that may well define the direction in which the mobile value chain is headed.

As per the deal, structured as a merger, STM will have control on the joint venture with about 80% stake. The company will pay NXP $1.55bn to close the deal in the third quarter. The merger combines two of the bigger wireless chipmakers, which together had about 10 percent of the global market in 2007, according to iSuppli. STM CEO Carlo Bozotti claimed that the joint venture will create a global leader with a more optimistic 14% market-share in wireless chips.

The companies’ combined wireless revenue for 2007 was about $3bn. They reported that the synergies are expected to save up to $250mn in 2011. Nokia (NOK), Samsung and Sony-Ericsson (SNE) are among the customers for the joint venture. The company will primarily compete with Broadcom (BRCM), and to a lesser degree, with Infineon (IFX) and Freescale (FSL), hoping to take market share away from TI. You can read more about TI’s precarious position in the mobile space and how such events aggravate this situation from my valuation series here, here and here.

Bozotti justifies the joint venture as a move to compete with the giants (Qualcomm (QCOM) and Texas Instruments [TI] (TXN)) on scale. “This is a business where scale is fundamental,” he says. The economy of scale, both in R&D and manufacturing, gives the leaders substantial ASP gains. The joint venture will also have a stronger IP position than either STM or NXP. This, in turn, gives it greater negotiating power in IP cross-licensing discussions further increasing its margins.

In addition to establishing a strong R&D team to develop 3G solutions and beyond, the joint venture has what I would call a complete portfolio of connectivity solutions. These technologies – WiFi, Bluetooth, FM and GPS - will be integral to tomorrow’s convergence devices. This allows the company to chalk out a product roadmap that integrates these solutions into a state-of-the-art single stop platform that will be attractive to handset vendors.

The wireless industry, especially the 3G chip vendor space, will consolidate and the stronger players will pick themselves out of the crowd. The joint venture is STM’s statement of arrival. Over the last couple of years it has made tremendous strides culminating in design wins from Nokia and Sony Ericsson. The joint venture will perhaps not make an immediate impact in its product line. It, however, expands its customer base and also positions STM to exploit the convergence market over the next few years. The need now is to make use of the synergies and deliver on its design wins. The need now is for agility and execution.

Disclosure: The author was long Qualcomm at the time of writing.