Texas Instruments: Texas Instruments is paying an eyebrow-raising 78 per cent premium for rival National Semiconductor. But the target is solidly profitable even with its factories running at a slow tempo. Speed them up — as this deal should — and TI should generate a nice return on its $6.5 billion investment.
National Semiconductor makes analogue chips for use in mobile phones, industrial equipment and LED lighting. The company has steadily dropped out of other markets over the past few years, so that now it is a pure play. That’s attractive to an acquirer for a few reasons. The margins are high — gross margins are greater than 60 per cent. And these sorts of chips have a much longer shelf-life than digital chips. So there’s relatively little capital expenditure.
National Semiconductor's operations should make about $460 million of operating profit in the fiscal year ending next month. If it raised this to $500 million next year, as analysts expect, that’s roughly an 8 per cent return. That’s reasonable, but not the sort of returns that normally drive deals. Yet chip company’s profits are highly cyclical. It costs a lot to build plants and make new chip designs. So once costs are covered, additional sales are highly profitable.
National Semiconductor is running its plants at about 60 per cent of capacity and has had trouble making inroads against larger rivals. Texas Instruments is a far bigger company — its analogue operations are about four times the size of the company it is buying. If the salespeople can drive additional sales — and the acquirer finds a few cost synergies along the way — returns on the deal could be around 15 per cent. And that’s a sweet result in a low-return world.
