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Chipmakers NXP and Freescale to combine in $11.8 billion deal

The two companies may potentially develop new Internet of Things chips together.

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The merger of NXP and Freescale will create a major player in automotive chips. Getty Images

NXP agreed Monday to buy fellow chipmaker Freescale for about $11.8 billion in cash and stock, bringing together two companies focused on the burgeoning Internet of Things market.

Both NXP and Freescale sell microcontrollers -- tiny processors that help run all kinds of devices, from appliances to energy meters to ultrasound equipment. Still, NXP may best be known to customers for its NFC wireless technology, which allows devices to connect to each other at close distances. Many smartphones now use this NXP technology to power their mobile payment systems.

The two have also been working to expand into the so-called Internet of Things, an idea of connecting just about any object to the Web and other objects, with both firms hoping to sell more of their chips into more things. Also, both have strong focuses on the automotive industry, so the merger should create a much bigger chipmaker in that space.

The Internet of Things market is expected to grow on average by 13 percent each year through 2020, reaching $3.04 trillion and connecting billions of objects that year, according to researcher IDC. But for it to become a reality, chipmakers need to help create the foundation it will be built upon, offering all the needed pieces of the puzzle -- processing, sensing, security and software -- in unified packages to sell to device makers and manufacturers.

So far, no one chipmaker has such a broad portfolio, but the NXP-Freescale deal should bring both companies closer to that goal.

The deal, already approved by both companies' boards, will combine two firms that were spun off larger companies. Netherlands-based NXP was created in 2006 after it spun out of Royal Philips, and Austin, Texas-based Freescale was spun from Motorola in 2004.

The merger is expected to close in the second half of this year.