Texas Instruments Takes A Big Swing

By Stephen D. Simpson, CFA | April 06, 2011 AAA

Texas Instruments (NYSE:TXN) had been on something of a roll for a while, gaining share in markets like amplifiers, power management and so on, and getting slots in products like the Apple (Nasdaq:AAPL) iPad. On top of that, deals in the analog chip space are relatively rare as chip architectures tend to be proprietary and there is a lot of market overlap.

So, of course it stands to reason that TI would do the unexpected and step up with a $6.5 billion bid for rival analog player National Semiconductor (NYSE:NSM).

Tutorial: The Basics Of Mergers And Acquisitions

The Terms of the Deal
Under the deal announced late on Monday, TI will pay National Semiconductor shareholders $25 in cash for each of their shares. That represents a 78% premium and a generous valuation. How generous? TI's bid values NSM at a P/E of 20-times and an EV/sales of 4.2 - well ahead of the blended averages of leading players like Analog Devices (NYSE:ADI), Linear Technology (Nasdaq:LLTC) and Maxim (Nasdaq:MXIM). (For more, see Mergers And Acquisitions: Valuation Matters.)

What TI Is Getting
Why would TI do this deal? With National Semiconductor in the fold, Texas Instruments will have a compelling power management business, particularly as TI has generally done best in the computer and handset markets, while NSM has been stronger in the industrial markets. This is not an encouraging development then for the likes of Maxim or ON Semiconductor (Nasdaq:ONNN). That said, customers will often tap at least two suppliers (one as primary and one as back-up), and there could be some incremental business to be had among those customers who already use TI and NSM and will need a new back-up.

On top of that, TI is acquiring a pretty well-run business that will offer up some real potential for synergies. National Semi has higher gross margins than TI and a relatively low utilization rate (in the 60s). Not only can TI reap some benefits from the normal redundancies, but also from plant consolidation.

A New Day in Analog? Probably Not
In the wake of the deal, it seems that a lot of analog stocks are getting stronger bids. To some extent, maybe that makes sense - TI would not do the deal if it expected imminent disaster in the chip sector, so perhaps this is vote of confidence in the industry. That said, the revaluation potential of this deal is somewhat limited - mostly because it would be very out of character for companies like Analog Devices or Linear to step up and make big deals in response.

What's more, the deal for National Semiconductor can also be seen as consistent with other deals for focused chip companies, along the lines of Qualcomm's (Nasdaq:QCOM) deal for Atheros. That, then, could be a positive for companies like Atmel (Nasdaq:ATML), Cavium (Nasdaq:CAVM), Mellanox (Nasdaq:MLNX), and Fairchild (NYSE:FCS) that have valuable specialties within their businesses. (For more, see Atmel Off To The Races.)

The Bottom Line
While there are solid arguments for TI's bid for NSM, it is difficult to get past the premium that TI is paying. That suggests a few potential interesting scenarios - namely, that TI really did not believe it could develop its own products to capture further share in power management (or at least not do so quickly), and/or that there were rivals for National Semiconductor. That latter idea would be intriguing if true, though not necessarily the best reason to pay so much.

Texas Instruments likely will squeeze a lot of value out of this deal; paying billions of dollars and getting roundly criticized for it tends to focus management attention. Still, there are more interesting ideas out there today, and National Semiconductor shareholders may want to put their newfound cash back to work in some of those. (For more, see Texas Instruments Suggests A Soft Landing In The Works.)

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