NEW YORK (The Deal) -- The Netherlands' NXP Semiconductors (NXPI - Get Report) on Monday, March 2, agreed to buy Austin, Texas-based Freescale Semiconductor (FSL) for $16.7 billion, including debt, to create an automotive computer-chip powerhouse, just as carmakers ramp up the level of technology in their vehicles.

NXP would offer $6.25 per share in cash as well as 0.3521 of its own shares for Freescale. The bid totals $36.14 per share, a scant premium to the target's Friday close of $36.11, and prices all of the equity at $11.8 billion.

"We fully expect to continue to significantly out-grow the overall market, drive world-class profitability and generate even more cash, which taken together will maximize value for both Freescale and NXP shareholders," said NXP CEO Richard Clemmer in a statement. Clemmer will become president and CEO of the enlarged company.

NXP and Freescale are hoping to capitalize on the race to introduce driverless cars, which are years off, but are seen as the next big innovation by carmakers and touted as the most popular displays at this year's winter car shows. Freescale already counts Germany's Continental, a tire and drivetrain supplier, as its biggest customer.

The companies said they would have a combined valuation of $40 billion and annual revenue of $10 billion. The boards of both companies are recommending shareholders approve the agreement, which would boost earnings in its first full year. Post-merger, Freescale investors would own 32% of the combined company.

Both Freescale and NXP have similar histories. They were both carved out of larger companies -- NXP from Royal Philips Electronics and Freescale from Motorola -- and eventually bought by financial investors. NXP was picked up by Kohlberg Kravis Roberts and Bain Capital in 2006 for $10.4 billion and Freescale was bought, also in 2006, by a PE consortium led by Blackstone Group with Carlyle Group, Permira and TPG Capital in a deal that included $7.1 billion of equity.

NXP's backers began exiting in a disappointing 2010 initial public offering and Freescale's owners sold a minority stake in a 2011 IPO to help pay down acquisition-related debt but still control the company.

NXP said it would fund the deal with $1 billion from its own wallet, $1 billion in new debt from Credit Suisse AG and 115 million new shares. The purchase is expected to close in the second half and ultimately allow $500 million in annual cost savings.

Chipmakers have been consolidating for more than a decade after a boom before the turn of the millennium abruptly ended and left a raft of new manufacturers battling against intense margin pressure.

In January, German chipmaker Infineon Technologies completed its $3 billion all-cash purchase of rival International Rectifier and, on Dec. 31, Vishay Intertechnology gained full control of Capella Microsystemscompleting its two-step acquisition of the Taiwanese optical sensors maker for slightly more than $200 million.

And both NXP and Freescale are seen as potential suitors for Micrel The San Jose, Calif.-based chipmaker is 12% owned by activist investor Starboard Ventures and in January hired Credit Suisse to mull its future.

Credit Suisse's Steve Geller and Wally Chung. also acted as NXP's financial adviser with Simpson Thacher & Bartlett's Gary Horowitz, Elizabeth Cooper, Nicholas Shaw, Sinead O'Shea, Rob Holo, David Rubinsky, Peter Guryan and Peter Thomas and De Brauw Blackstone Westbroek's Arne Grimm and Reiner Kleipool providing counsel. NXP's in-house legal counsel came from Guido Dierick and Jean Scheurs.

Morgan Stanley's Bob Eatroff and Mark Edelstone acted as financial adviser to Freescale with a Skadden, Arps, Slate, Meagher & Flom team of Allison Schneirov, Ken King, Amr Razzak and Alexandra McCormack acting as legal adviser. Freescale also relied on in-house legal advice from Jennifer Wuamett and Dathan Voelter.

Skadden also represented Freescale backers Blackstone,  Carlyle, Permira and TPG, having assisted the consortium in the original 2006 buyout and the 2011 IPO.

David Marcus contributed to this report.

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