NXP Semiconductors N.V. (NASDAQ: NXPI) has been absolutely crushed after earnings. What is unusual is that it seems very off-base, considering its growth opportunity and how investors had been treating NXP. More importantly, the move down is severely hurting shares of Freescale Semiconductor Ltd. (NYSE: FSL), as Freescale has an agreement to be acquired by NXP. A case can be made here that the gains of the merger just may not quite be as strong as they once were.

NXP beat earnings expectations with a report of $1.57 in per share, which was $0.07 ahead of the $1.50 consensus estimate from Thomson Reuters. What hurt was that revenues rose 0.5% to $1.52 billion, shy of the $1.55 billion expected. The company generated $266 million non-GAAP free cash flow. Then came more pain from the guidance for the fourth quarter. The company sees revenues down in the low double to mid-teens range. This is a contraction rather than the $1.58 billion expected.

NXP then said it was expanding its share buyback program by up to 20 million shares. That is after having repurchased some 1.8 million or so shares in the last quarter for a total cost of $158 million. With a big merger taking place here, what good does an expanded buyback do?

So, here is why Freescale investors may need to be at least a tad worried now. Under the terms of the agreement, Freescale shareholders are slated to receive $6.25 in cash and 0.3521 NXP ordinary shares for each Freescale common share held. At the time the deal was announced (March 2, 2015) the acquisition terms were roughly $11.8 billion, with a total enterprise value (equity plus debt) of approximately $16.7 billion. The companies further said that the transaction would be expected to close in the second half of calendar 2015.

NXP said at the time that it intends to fund the transaction with $1.0 billion of cash from its balance sheet, $1.0 billion of new debt and approximately 115 million NXP ordinary shares. Freescale shareholders will own approximately 32% of the combined company.

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Management outlined why its guidance was weak, and it is officially remaining committed to its planned acquisition of Freescale. The company said:

As we entered the third quarter, we noted a weakening of demand as our customers began to communicate concerns with an uncertain economic environment. As the third quarter progressed, our end-customers, across multiple end-markets continued to voice an increased and significant degree of uncertainty around any increase in demand. This has resulted in lower than planned sell-through and an increase of channel inventory. As a result, our guidance for the fourth quarter reflects a much more cautious view of near term sales which may occur during the quarter.

Notwithstanding the current business trends, we continue to make significant progress with the previously announced merger between NXP and Freescale Semiconductor, which we continue to believe will represent a transformation of NXP. The overall regulatory approval process is progressing as anticipated and we believe we are on track to close the transaction in the fourth quarter of 2015.

We continue to make very good progress on the integration planning of the two companies. We believe the merger of the two companies will drive significant cost synergies and broaden our product platform which will provide a significant catalyst for customer and shareholder value creation.

For the most recent settlement date, NXP saw its short interest rise to 16.93 million shares with 4.8 days to cover from the previous level of 16.10 million with 5.3 days to cover.

Shares of NXP were last trading down 19% at $73.57 in late-Thursday trading, with a consensus analyst price target of $123.41 and a 52-week trading range of $63.52 to $114.00. The company has a total market cap of roughly $17 billion at the current price level.

Freescale shares were also down, 16.5% at $31.73 on last look. Its 52-week range is $17.82 to $45.67, and its market cap is now $9.9 billion, with a consensus analyst price target of $44.73.

At the end of January, Freescale shares were at $26.35, and then they went just over $40.00 after the NXP acquisition was announced. The stock peaked at $45.00 right at the start of summer — but now they are down almost by one-third after Thursday’s drop.

When Freescale issued earnings and guidance commentary on October 22, there seemed to be far less of a concern than this might have brought up ahead of time. The commentary was far from perfect and did not show declining trends, but not as bad as what pre-earnings investors might have been braced for. Freescale said at that time:

Third quarter results represented another quarter of solid execution in a challenging environment. Although revenues declined sequentially and year-over-year, the team delivered gross margins that were in line with Q2 and 180 basis points above third quarter last year. We managed operating expenses lower than prior periods and continued to deleverage the balance sheet. This, combined with the execution on gross margins, contributed to adjusted earnings per share of $0.54.

The fourth quarter will pose challenges as market conditions have continued to weaken. Our results will be impacted in the quarter by normal seasonal declines in our automotive related businesses, continued weakness in wireless infrastructure and enterprise spending which will negatively impact our RF and Digital Networking businesses and weak end-demand in industrial which will lead to lower Microcontroller revenues.

Looking past the near term demand softness, we are encouraged by the growth prospects in our core markets and the significant value creation inherent in the combination with NXP Semiconductors.

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Concerns have been brought up in the European Union and by the Federal Trade Commission. Those concerns have supposedly been dealt with via carve-outs and sales, but both companies had approved this deal back in early July.

When Freescale earnings were reported on October 22, the stock price was closer to $40.00 than the $31.75 now. Do Freescale shareholders have a right to be worried?

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