Texas Instruments (TXN) Chief Executive Officer Rich Templeton is paying $6.5 billion for National Semiconductor Corporation (NSM) in a wager that he can reverse its sales slump while profiting from the company’s higher margins.
National shareholders will get $25 a share in the all-cash transaction, Texas Instruments said yesterday. That’s 78 per cent higher than National’s closing price of $14.07 yesterday, representing a premium four times bigger than the chip industry’s average over the past year. To ensure a payback, Texas Instruments aims to use its army of salespeople to stoke demand for National’s products. The Dallas-based company has a bigger sales force than any other chipmaker, Templeton says, with more representatives in China alone than National has in total. He has vowed to increase revenue at more than twice the industry rate, a feat National hasn’t pulled off in years.
“They think they can take National Semiconductor’s business and execute better,” said Daniel Berenbaum, a New York-based analyst at Auriga USA who recommends selling Texas Instruments’ stock. “They are buying customers.”
National Semiconductor rose as much as 81 per cent to the equivalent of $24.33 in German trading today and was up 76 per cent as of 9.43 am in Frankfurt. STMicroelectronics NV (STM) and Infineon Technologies AG, Europe’s two biggest chipmakers, both rose as much as 3.7 per cent in Milan and Frankfurt. ARM Holdings (ARM), the UK designer of chips that help power Apple’s iPhone, rose as much as 2.7 per cent in London.
National Semiconductor has been shedding less profitable businesses, sacrificing revenue, in the name of wider margins. Its gross margin, the percentage of sales remaining after deducting the cost of production, was 66.5 per cent at the end of its most recent quarter. That compares with 53 per cent at Texas Instruments.
The deal reaffirms Templeton’s commitment to analog chips — National’s specialty. Analog semiconductors, which go into everything from military hardware to washing machines, perform functions such as power regulation and conversion of real-world inputs, like touch, sound, into electronic signals.
Texas Instruments is the biggest maker of analog chips, and they account for 43 per cent of its revenue - up from 35 per cent five years ago. Meanwhile, the company is exiting the market for mobile-phone radio semiconductors, an area it once dominated. With National, Texas Instruments can add new analog products faster than it could on its own, Templeton said.
Analog bet
“We’ve got a sales force that’s simply never been better at selling analog,” Templeton said on a call with analysts and investors yesterday. “It’s an opportunity to grow faster.”
National provides Texas Instruments with more of the market for industrial-use chips, he said. While both companies make chips that control power in electronic devices, National specialises in higher voltages used in industrial machinery, while Texas Instruments’ products are more suited to mobile devices.
The challenge will be ramping up National’s sales, which declined each of the past four fiscal years.
Given the pitfalls, the price is too high, said Romit Shah an analyst at Nomura Securities International in New York. The deal’s premium dwarfs the average paid in 196 semiconductor acquisitions in the past year, according to Bloomberg data. The average disclosed size of those transactions was $129.8 million.
“They are paying way too much,” said Shah, who recommends selling Texas Instruments stock. “We’re not very excited about the deal.”
Cash and debt
Texas Instruments fell as much as 2.5 per cent to $33.25 in late trading yesterday after the company announced the deal. Shares of National Semiconductor, based in Santa Clara, California, rose to $24.53. The last time the stock traded at $25, the transaction price, was in November 2007.
The purchase will be funded with a combination of existing cash balances and debt, Texas Instruments said. The company had $3.07 billion in cash and short-term investments in the fourth quarter.
If National pulls out of the deal to accept a superior proposal, it will pay a termination fee of $200 million to Texas Instruments, according to a regulatory filing. If the agreement fails to win antitrust approval, Texas Instruments will pay National Semiconductor a breakup fee of $350 million.
Morgan Stanley, the financial adviser for Texas Instruments on the deal, is providing $2.5 billion in a bridge loan to the company, according to a person with knowledge of the matter. Jones Day provided legal advice to Texas Instruments. Qatalyst Partners and Goldman Sachs Group were National Semiconductor’s financial advisers. Latham & Watkins LLP acted as legal counsel.
“It’s a great opportunity to put $6.5 billion to work earning a pretty good rate of return,” Templeton said.
