TI acquires NSM: Picking apart the deal

by James Montgomery, news editor

April 5, 2011 – Texas Instruments is acquiring National Semiconductor for about $6.5B in cash ($25/share), combining two analog stalwarts in a play to flex "strength and growth," according to TI chairman Rich Templeton.

The combined company would offer roughly 42,000 products (30k from TI, 12k from National) and a >2500-strong sales team, about 10× what National has now, the company noted. TI has of course its flagship 300mm analog-only fab in Texas, but National brings to bear its own facilities in the US (Maine), Europe (Scotland), and Asia (Malaysia) — wafer fabs, assembly test, and capacity, Templeton noted in a statement.

The two firms raked in about $7.6B in sales in 2010, within the $42B analog semiconductor market (representing about 18% share). The combined TI-NSM would be the No.3 biggest semiconductor company, leapfrogging Toshiba, notes IHS iSuppli. (Intel and Samsung are still way out in front at 1-2.) But in analog, this deal pushes TI even further ahead of No.2 STMicroelectronics, with 8.8% market share (vs. 5.7% before).

Two key areas illustrate the wisdom behind this M&A. TI was the leading voltage regulator supplier in 2010 ($1.7B, 18.1% share); NSM was third ($758M, 15.2% share). Combined they’ll have $2.4B and 26.5% market share, in a market sector that outpaced overall semiconductor growth in 2010 (36% vs. 32%) and over the past nine years (169% vs. 93%), noted IHS iSuppli. TI also dominates in analog/comparator ICs, with $932M in sales last year and a 24.6% share. Adding NSM’s $364M in this sector boosts that to $1.3B and 34.2% share.

Other tidbits about the proposed TI+NSM combination:

  • The deal carries a hefty breakup clause: $200M if National finds a higher bidder, and a $350M "reverse termination" fee if TI walks away from the table, according to the official SEC filing. (And as usually happens in M&A announcements, several lawsuits are already being filed probing whether National could & should have done better.)
  • The two companies currently say they will keep NSM’s 150mm and 200mm fabs with their low costs and decent (mid-60%) utilization rates, but eventually it’s likely TI will shift some of that production to its own 300mm facilities for cost-saving reasons, notes FBR Research analyst Craig Berger. Likewise, Ross Seymore from Deutsche Bank "would not be surprised to see TXN consolidate its combined manufacturing footprint going forward," if TI can’t quickly deliver on promises of raising NSM’s revenue growth — NSM’s 27% in 2010 and -12% "peak-to-peak" growth (3Q10 vs. 3Q08) were significantly worst among the analog field.
  • Their products are actually quite complimentary, notes John Pitzer from Credit-Suisse. In power management TI is more oriented toward portable devices, while NSM is focused on high-voltage. And NSM has a big chunk (45% of sales) in industrial, while TI has more exposure to PCs and communications (67% of analog sales).
  • Morgan Stanley is providing $2.5B in financing to TI, according to Bloomberg.
  • Some are wondering whether TI is overpaying for National — the numbers work out to a >19× P/E ratio. (National’s stock price has already skyrocketed to nearly wipe out the ~78% premium of TI’s bid (based on NSM’s Monday 4/4 stock price; TI is up barely 1% after the announcement.) Seymore suggests that TI "may have paid more than necessary," citing TI’s $25/share bid as a 10% premium even to NSM’s three-year stock high. But TI’s Templeton explained that from a capital/revenue or price/revenue standpoint it’s more palatable, around 4.1×. Berger points out that the purchase price is "not inexpensive considering National’s growth rate," but it’s also fair given "manufacturing synergies and cost reductions that TI is likely to achieve in coming years." (The company stated it expects ~$100M in operating cost savings and synergies, but not much in manufacturing.) Pitzer agrees: "We view the premium as justifiable if TXN is able to drive NSM growth to TXN rates."
  • Should we expect more analog consolidation? Possibly, says Berger, given the sector’s fragmented nature (ADI, Infineon, ST, Maxim, Linear, Microsemi, Intersil, Power Integrations, Micrel), with either TI as the catalyst or others banding together to build scale and manufacturing efficiencies to better compete against TI+NSM. Pitzer isn’t so sure about more analog M&A, though. "TXN’s acquisition of NSM is unique in that it will be immediately GM/OM and EPS accretive," while smaller analog players operate at lower gross margins (<58% vs. TI’s 59% for analog), he notes. Deutsche Bank’s Seymore agrees: " While this move will benefit analog-sector valuations in the near-term, we do not expect accelerating consolidation to result." The most likely player to make a move was TI; any likelihood of smaller deals probably puts Intersil at the front, given its size relative to remaining larger players ADI and Maxim, he writes.


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