Texas Instruments is not known for making huge acquisitions. Until Monday (April 4), the last time it rocked the market with anything close to or above $1 billion was in 2000 when it acquired Burr-Brown for an eye-popping $7.6 billion. Following that transaction, TI settled into organic growth while gobbling up the occasional bite-size transactions meant to fill product lines on a steady basis.
Rich Templeton, TI president, chairman and CEO, is often unapologetic about his often-stated belief that large acquisitions in the semiconductor industry usually don't make financial sense, often getting the parties stuck in a quagmire.
So why is TI making its biggest acquisition in more than a decade by offering to buy analog rival National Semiconductor for $6.5 billion in cash? After all, the transaction will increase TI's market leverage, and likely attract some regulatory scrutiny, which the company should withstand easily. However, the deal will result in some integration distractions for Dallas-based TI, distractions that rivals will try to exploit in order to negate some of the gains both companies are expecting from the deal.
While some industry observers and financial analysts may question TI's decision to pay $6.5 billion for a struggling rival with less than $1.5 billion in annual sales (for fiscal 2010 sales were $1.42 billion), TI can point to several advantages from the transaction. These include the opportunity to boost National’s revenue by deploying its highly motivated sales force, add about 12, 000 new products to its portfolio along with seasoned, scarce analog engineers and reach new markets. The result will be increased leverage in the analog market.
Furthermore, TI is wisely deploying cash at a time of low returns from investment markets. Cash on most companies' balance sheets today is generating meager returns whether from U.S. Treasury, corporate or municipal bonds along with overseas investments. Keeping more than $3 billion on the balance sheet might make sense for companies with limited ability to generate additional cash flow or that need it for capital expenditures, but this is not a problem at TI. In addition, the chip maker will be tapping the investment market for financing at a time of low interest rates. The result is likely to be rapid, strong returns on the investment.
It's a move few analysts quarreled with during a conference call with TI executives to discuss the transaction. Indeed, many analysts offered congratulations to Templeton although a few had tough questions about timing, the additional leverage TI would be assuming and the expected returns from the investment.
As with most acquisitions, the announcement of the deal will temporarily hurt National as OEM customers wait to see which products might be phased out and which would be retained. Customers will also need to be reassured of regulatory approval, which would involve as many as 10 different international regulatory agencies, according to TI officials. During the expected six- to nine-month review period, the fate of National's products will be in limbo, and customers may move on rival suppliers. Winning these customers back may be difficult.
Despite the potential hurdles, the acquisition is certain to tip the overall competitive environment heavily in TI's favor while helping boost its analog IC market share past the current 14 percent. TI, in fact, could see its market share expand above the combined 17 percent the two companies currently hold as it leverages an extensive sales network to drive sales of National products.
The 85 percent premium TI is offering for National also indicates the level of confidence TI execs have in the transaction, and their ability to rapidly boost flagging growth rate for National's products. During the conference call, they made it clear that the opportunity to generate higher sales for National products was a key factor. TI, which said it introduces 500 analog parts per year, will automatically gain 12,000 new products in a market where building portfolios "takes a long time," according to Templeton.
"National's growth potential has yet to be met," Templeton said. "We can significantly expand National's sales force and our combined sales force will be 10 times larger than what National currently has."
TI will be taking on debt to finance the transaction, but the company is not expected to have any problems securing the financing. It closed its December 2010 quarter with zero long-term debt, and more than $3 billion in cash and short-term investments. TI also had about $500 million in long-term investments and generates a steady stream of cash from operating activities each quarter. National Semiconductor had about $1 billion in cash and short-term investments at the end of its fiscal quarter ended Feb. 27. This was cancelled out by about the same amount in long-term debt.
The higher debt TI will assume as a result of this deal is not a concern to the investment community, however. They will likely be more focused over the next nine months on how quickly TI can get regulatory approval and how soon it can complete the integration of National Semiconductor personnel to realize the promised benefits of the acquisition.
TI makes components but it sells "block diagrams", that is, superior and complete solutions
S-factor (S for solutions) revenue and profit benefit Ė a systemís strategic component pulls in an entire solution revenue and generates a superior profit
-- TI has to provide all solutionís elements (directly or indirectly via partners)
-- Strategically critical solution technologies are acquired or partnered
-- Power management (standard power products - a 2-year old new HPA group) was $1.77B in FY2010 - HPA group (standard signal chain products) was $1.79B
National is the second ranked power management IC vendor (after TI); nearly one-half of its total $$1.4B revenues comes from power management.
National is also well positioned to become the
industry's top IC vendor in terms of performance and valuation -- IF it can reduce its large GSA expenses - something, like changing a DNA, is very difficult to do.
National was founded in 1959; its revenues declined 50% from $2.7B in 1997 to $1.4B in 2010. For decades the company was wandering
in a digital desert pursuing "PC on chip" and other distractions; only in 2005 did National
reintroduce a word "analog" in its description.
BTW - it is also fairly obvious who will likely acquire whom next...
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