Texas Instruments Inc (TI) is buying National Semiconductor Corp (NatSemi) for US$6.5 billion, paying a rich 78 percent premium to merge two of the industry’s oldest firms into a dominant force in analog microchips used in products ranging from phones to cars.
The deal sparked a rally in the shares of microchip makers from Nvidia Corp to Marvell Technology Group Ltd, of 2 percent to 3 percent on speculation of broader consolidation.
TI will pay US$25 for each NatSemi common share, lifting the stock 74 percent to US$24.45 in after hours trading. TI shares fell 1.5 percent to US$34.11.
Photo: Bloomberg
The acquisition would extend TI’s lead in the vast but fragmented market for analog chips, while NatSemi, with a strong portfolio of power management microchips for industrial uses as well as for wireless telephones, may be open to a deal because it lacks stronger long-term growth prospects.
“It will improve TI’s position in power management chips — that’s where National has particular strength,” Morningstar analyst Brian Colello said.
The premium led some analysts to speculate that TI might be hoping to seal a deal and thwart rival bidders. However, TI said it was “comfortable” with the price, and both companies touted an annual US$100 million in cost savings as they share sales forces and capacity.
“Texas Instruments has been a pretty prudent company. There is either some kind of buried patent [owned by NatSemi] that is unbelievably attractive to them, or there were other bidders and they felt pressured to get it,” said Fort Pitt Capital analyst Kim Caughey Forrest.
Others said NatSemi’s shares had become undervalued and that the acquisition price of about four times sales is not excessively expensive.
“It’s in the ball park of price-to-sales multiples that other peers are trading at,” Gleacher & Co analyst Doug Freedman said. “Yes, the premium is large but I think without paying that premium they’re not getting the company.”
Shares of NatSemi have fallen about 3 percent over the past year.
Analog chips translate real-world phenomena like sound, temperature and light into the 1s and 0s that comprise digital computer language. They are instrumental in regulating electricity consumption — a crucial point for power-hungry smartphones and tablets and their battery lives.
Apple Inc’s iPod Touch MP3 player and Motorola Inc’s Xoom tablet computer both use power-related analog chips made by Texas Instruments, according to IHS iSuppli. The average cell phone has as many as 30 different power management parts.
“Digital chip makers like Intel used to disdain analog, but it’s the way you get information in and out of these mobile devices,” Caughey Forrest said.
Frank Quattrone’s Qatalyst Partners and Goldman Sachs advised NatSemi on the deal, while Morgan Stanley advised Texas Instruments.
The deal brings together two of the industry’s most storied players, and could catapult TI past Japan’s Toshiba Corp to the No. 3 global ranking in the overall semiconductor market with a 4.5 percent share.
The combination of TI and NatSemi would create a player that controls nearly a quarter of the market by revenue, based on Gartner Inc’s estimates of last year’s revenue for analog chips.
Gartner analyst Steve Ohr said acquiring NatSemi will help TI solidify its position as the No. 1 maker of power management chips, which often carry higher price tags and profit margins than other chips.
“It’s the largest, fastest growing chunk of the analog market,” said Ohr. “You can’t build an electronic system without them.”
TI, which has been winding down its less profitable baseband mobile telephone business while increasing its stake in analog chips, said it will finance the deal with a combination of existing cash and debt.
The merger has been unanimously approved by the boards of directors of both companies.
TI in recent years has acquired facilities and equipment, giving it the capacity to produce US$4.5 billion of analog chips a year in the US, Japan and China.
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