On Thursday, Qualcomm (QCOM) - Get Report  said that it has agreed to purchase NXP Semiconductors (NXPI) - Get Report for $39 billion, making it the biggest deal to ever hit the chip sector.

The deal would beat Avago Technologies' $37 billion merger last year with Broadcom and, for pure technology deals, rank behind only Dell's $60 billion purchase this year of EMC.

Terms of the deal value NXP Semiconductors, a supplier of chips for the automotive market, at $110 a share. The stock is trading at about $98 a share, so there is plenty for investors to be excited about.

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Qualcomm, which supplies cellphone chips, sees NXP Semiconductors as its entry into the lucrative autonomous-vehicle industry. The deal would also move Qualcomm further into the chip-making process.

The company designs and sells mobile phone chips, which are used in most of the world's leading smartphones including Apple's iPhone, but the products themselves are manufactured by Taiwan Semiconductor Manufacturing, which also makes products for other chip designers.

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NXP Semiconductors, on the other hand, owns seven silicon chip-making factories, thanks to its purchase last year of Freescale Semiconductor, as well as other plants where chips are tested and packaged.

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Although chip manufacturing can be an extremely costly process, NXP Semiconductor' operations have been resoundingly profitable. So this isn't much of a gamble for Qualcomm.

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On Wednesday, NXP Semiconductors reported third-quarter results, which showed an increase in operating income to $691 million from $449 million a year earlier. And revenue rose 62% to $2.47 billion.

However, earnings fell to $91 million or 26 cents a share from $361 million or $1.49 a share a year earlier.

During its fiscal third quarter, Qualcomm recorded a profit of $1.4 billion or 97 cents a share, up from $1.2 billion or 73 cents a share a year earlier. Revenue rose 4% to $6 billion.

Qualcomm reports fiscal fourth-quarter earnings on Wednesday.

The company expects the deal to give a significant boost to its earnings.

Qualcomm expects the combined company to generate $500 million of annualized run-rate cost synergies within two years of the deal's finalization. The combined company is also expected to generate annual revenue of more than $30 billion.

Investors have lauded Qualcomm's purchase, sending the stock up more than 3% on Thursday. This deal will help Qualcomm expand further into sectors with growing potential for both companies and their investors.


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The author is an independent contributor who at the time of publication owned none of the stocks mentioned.