The largest acquisition in the history of the semiconductor industry has turned the spotlight on the analog-IC market, leaving competitors and observers to contemplate the wake left by Texas Instruments Inc.
By engaging in a $7.6 billion stock deal to acquire Burr-Brown Corp., TI not only set a high-water mark for mergers in the sector, it may also have opened an acquisition floodgate in one of the most diverse markets in the semiconductor field.
"Five years ago, you could have bought TI for $7.6 billion," said Will Strauss, an analyst at Forward Concepts Co., Tempe, Ariz. "Valuations have gone out of sight."
TI managed to wrestle away the lead in the highly fragmented analog market from STMicroelectronics in 1999. The move to add Burr-Brown will broaden its portfolio to include high-performance converters and amplifiers. Burr-Brown's anticipated 2000 revenue of $400 million, however, is expected to add only modestly to TI's overall percentage lead in the analog market.
"Analog is unique in the industry," said Mark Edelstone, an analyst at Morgan Stanley Dean Witter & Co., San Francisco. "If you look at DRAMs, SRAMs, flash, processors, ASICs, PLDs, you name it, the top 10 guys in every segment control 90% or more of the market. In analog, which accounts for about 15% to 20% of the total semiconductor industry, the top 10 own only 55% of the market."
With analog components in increasing demand by fast-growing communications markets such as cellular handsets, the market segment is showing unprecedented growth. A push for mergers and acquisitions is sure to follow, analysts said.
The Burr-Brown acquisition, expected to be completed in the third quarter, is already the third analog-related acquisition for TI in the past year. In October, it acquired Unitrode Corp., a power-management specialist, for $1.2 billion, and in November it picked up Power Trends Inc., a power-supply manufacturer, for $145 million.
"For the longest time the analog market had been very stable," said Brian Matas, an analyst at IC Insights Inc., Scottsdale, Ariz. However, a comparison of the first quarter of this year with the same period in 1999 shows that in dollar terms, voltage regulators are up 88%, telecom-specific analog devices 71%, interfaces 62%, and amp-lifiers 61%, Matas said.
"In comparison, from 1994 to 1999 the average growth rate in those markets was between 10% and 15%. Suddenly, the market has exploded, and that's part of the justification for what TI paid," he said.
Possible acquisition targets were hotly debated following TI's announcement, as leading analog competitors such as Infineon, ON Semiconductor Philips, and STMicroelectronics may feel pressure to spur their market momentum. Second-tier analog companies with annual revenues between $500 million and $1.5 billion-such as Analog Devices, Linear Technology, and Maxim Integrated Products-were identified as potentially ripe for a takeover.
"If TI pays $7.6 billion for $400 million in sales, it sort of establishes the value of advanced analog," said Robert Swanson, chairman and chief executive of Linear, Milpitas, Calif.
"If somebody wants to offer us $50 billion or $60 billion, we're for sale," Swanson said. "In truth, this is a vindication of what we've been doing. Analog has gone from 'who cares' to all of a sudden it's strategically important and people are talking about the need for acquisition."
It's evident that if Intel is going to be successful in the DSP market, where it has formed a joint alliance with Analog Devices, it will have to expand its capabilities in data conversion, Forward Concepts' Strauss said.
"My shock a year ago [when the DSP alliance was announced] was that Intel just didn't announce they would buy Analog Devices," Strauss said. "I think today the price would be pretty steep."
A spokesman for Analog Devices Inc., Norwood, Mass., declined to speculate about a potential acquisition, but said TI's purchase of Burr-Brown will not undermine its position in the data-converter market.
"It reaffirms the importance of having high-performance analog, which TI really hasn't had," the spokesman said. "We have leading market share in most of the product segments Burr-Brown has been in. We're very comfortable with our strategy. ... Long term, it's always a challenge acquiring a company and we'll have to see how well it works for TI."
The acquisition "shows that TI is as serious about analog as it is about DSP," said Alun Roberts, market director of advanced analog products at TI. "We're the volume market leader in analog, and we've been challenged in the past on whether people thought we were seriously a performance leader. I think with Unitrode last year, and Burr-Brown, that puts that one to rest."
TI has a quarterly revenue run rate of about $800 million in analog products, Roberts said. Burr-Brown can add another $100 million, allowing TI to quickly hit a $1 billion quarterly revenue mark.
The high-performance converters and precision amplifiers in Burr-Brown's portfolio will allow TI to further improve its DSP attach rate, a measurement of how many TI analog products are used alongside each DSP the company sells.
The acquisition would also soak up one of the most durable companies in the history of the semiconductor industry. Formed in 1956, Burr-Brown has been a consistent, if somewhat small and slow-growing factor in the analog market. Under terms of the agreement, Burr-Brown will become part of TI's catalog analog organization.
Syrus Madavi, Burr-Brown's chairman, president, and chief executive, said there are "compelling synergies" between it and TI. "The makers of Internet appliances and communications systems will have the best of both worlds in one company, with complementary components to optimally meet their total signal-processing requirements," Madavi said.
TI plans to issue 1.3 shares of its common stock for each outstanding share of Burr-Brown. The acquisition is contingent on approval by Burr-Brown stockholders and antitrust review.