Chip Industry Looking Forward To Texas Instruments’ Next Big Deal, Preferably In Analog

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TXN: Texas Instruments logo
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Texas Instruments

In one of our articles, we questioned whether Texas Instruments (NASDAQ:TXN) will become a part of the recent mergers and acquisitions spree underway in the semiconductor industry, which saw big deals such as Avago-Broadcom and Intel- Altera driving the huge waves of consolidation this year. [1] Once again, Texas Instruments has come into the limelight in the same rumors. The company is being tipped as chip industry’s next big consolidator. Texas Instruments could be gearing up to make the next big deal in what has already been a record-breaking year for semiconductor M&A.

The company , which has a market capitalization of $56 billion, has so far stayed on the sidelines as peers Intel Corp (INTC), Avago Technologies Ltd (AVGO) and NXP Semiconductors NV (NXPI) made acquisitions worth tens of billions of dollars earlier this year. TI is looking for large acquisitions as well, according to reports.   It held talks to acquire Maxim Integrated Products Inc (MXIM) late last year but discussions broke off when Maxim, which has a market capitalization of about $10 billion, decided not to sell itself. TI also considered buying Freescale Semiconductor Ltd (FSL) before Freescale agreed to be acquired by NXP in March for $11.8 billion.

Driving TI’s appetite for M&A, according to the sources, is a desire to improve on its profitability and increase its share in the fragmented market for analog circuits, which process linear signals including sound and light waves. These devices include various control circuits that generate specific signals, modify such signals, or convert such signals to digital binary signals for processing. The right deal could boost TI’s operating margins and profits by increasing the utilization rates in TI’s 21 fabrication plants in nine countries. This could be done by tapping the production volumes from the acquisition target over a number of years, according to the sources. The company added that among the things TI looks for in acquisitions are that the target company is an analog chipmaker, preferably in the industrial or automotive markets, and that a deal must provide a strong rate of return. TI’s CEO Rich Templeton has noted most of the recent acquisitions have a free cash flow yield of 3% to 4%, while the National Semiconductor deal was about 6%, which we take as a company threshold. [2]

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TI has always been an acquirer and seller, having evolved from a conglomerate in the 1990s with a diversified semiconductor business to a focused analog company with an even more focused digital offering. Much of this latter transformation, especially with the semiconductor business, has occurred since TI’s Chief Executive Rich Templeton assumed his earliest leadership positions in the company. Thus, TI has made its strategy in the last seven to eight years to focus on the analog and microcontroller markets.

Our price estimate of $50 for TI is at an approximate 7% discount to the current market price.

See our complete analysis of Texas Instruments here

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Notes:
  1. Will Texas Instruments Be Part Of The Recent Mergers & Acquisitions Wave?, Forbes, June 10th, 2015 []
  2. Will Texas Instruments sit out wave of mergers and acquisitions?, Dallas News, May 28th, 2015 []