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TI’s $6.5B Offer Rescues National From Humdrum Growth

The way Don Macleod tells it, {complink 3614|National Semiconductor Corp.} “was not looking to be acquired” when rival analog vendor {complink 5703|Texas Instruments Inc.} approached it with an acquisition offer. The deal, though, “provides a very compelling value for our shareholders,” according to Macleod, National's CEO.

That's an understatement. The hefty, almost 80 percent premium TI offered for National values the company at about $6.5 billion, almost double its market capitalization the day prior to the announcement of the transaction on April 4. For National, the acquisition offer promises a rescue from a humdrum future marked by limited growth and mediocre market share.

Let's be frank. National was busy going nowhere until TI offered to acquire it. Although the Santa Clara, Calif.-based company had successfully reorganized operations in the last year, it is still struggling to boost sales and maintain margin growth. Sales for the fiscal year ending in May were forecast to be approximately $1.51 billion, up 6 percent from $1.42 billion in fiscal 2009 but well below the $1.9 billion reported in fiscal 2008.

Although it is paying a high premium to gain National, the transaction represents a good opportunity for increased market share for TI. The company is not known for making huge acquisitions. Until Monday, the last time it rocked the market with any merger and acquisition deal close to or above $1 billion was in 2000 when it bought Burr-Brown for an eye-popping $7.6 billion. Following that transaction, TI settled into organic growth while gobbling up the occasional bite-sized transactions meant to fill product lines on a steady basis.

Rich Templeton, TI president, chairman, and CEO, is reputed to be unapologetic about his often-stated belief that large acquisitions in the semiconductor industry usually don't make sense financially and often end up getting the parties stuck in a quagmire.

So, why is TI making its biggest acquisition in more than 10 years by offering to buy fellow analog vendor National for $6.5 billion in cash? The transaction will increase TI's leverage and probably attract some regulatory scrutiny, which I believe the company will manage quite easily, but it will also result in some integration distraction for Dallas-based TI that rivals will try to exploit to shave down the gains both companies are expecting from the deal.

While some industry observers and financial analysts may raise an eyebrow about TI's decision to pay such a high premium for a struggling rival with less than $1.5 billion in annual sales, and which has only begun to make a headway in putting its financial house in order, TI can point to several advantages from the transaction. These include the opportunity to rapidly boost sales growth at National by deploying its own highly motivated sales force, gain thousands of new products (12,000 to be precise), add seasoned and scarce analog engineers, reach new markets, and boost its competitive leverage against rivals.

Furthermore, TI is smartly deploying cash at a time of low-returns from the investment markets. Today, cash on most companies' balance sheets is generating meager returns, whether from US treasuries, corporate or municipal bonds, or overseas investments. Keeping $3 billion or more on the balance sheet might make sense for companies that have limited ability to generate additional cashflow and require this for capital expenditure, but this is not a problem at TI. In addition, TI will be tapping the investment market for financing at a time of low interest rates, securing the opportunity for rapid and strong returns on its investment.

It's a move few analysts quarreled with during a company conference call held to discuss the transaction. Actually, many of the analysts on the call were busy offering congratulatory messages, although a few had probing questions about the timing of the transaction, the additional leverage TI would be assuming, and the expected returns from the investment.

As with most acquisitions, the announcement of the deal will temporarily hurt National as OEM customers wait to see which products might be phased out and which would be retained. They will also need to be reassured of regulatory approval, which would be required from as many as 10 different official organs globally, according to TI officials. During the six- to nine-month period TI expects will be required to close the transaction, National's offerings could be in limbo, and customers may move on to rivals. Winning these customers back may be difficult.

Despite the potential hurdles, the acquisition is certain to tip the overall competitive environment heavily in TI's favor and help it boost market share past the current 14 percent the company commands in the analog semiconductor market. TI, in fact, could see its market share expand even dramatically above the combined 17 percent the two companies currently have as it leverages its more extensive sales network to drive sales growth for National products.

The high premium TI is offering for National indicates the level of confidence the company has in the transaction and in its ability to rapidly boost flagging growth rate for National's products. TI executives during a conference call made it clear the main draw of the latest deal was the opportunity to generate higher sales for National products. Also, TI, which said it introduces 500 analog parts per year, will automatically gain 12,000 new products in a market where building portfolios “takes a long time,” according to CEO Templeton.

“National's growth potential has yet to be met,” Templeton said, during the conference call. “We can significantly expand National's sales force, and our combined sales force will be 10 times larger than what National currently has.”

TI will be taking on some debts to finance this transaction, but the company is not expected to have any problems securing the financing. It closed the December quarter with zero long-term debt and more than $3 billion in cash and short-term investments. TI also had about $500 million in long-term investments and generates a steady stream of cash from operating activities each quarter. National had about $1 billion in cash and short-term investments at the end of its fiscal quarter ended Feb. 27, cancelled out by about the same amount in long-term debt.

The higher leverage TI will assume as a result of this deal is not a concern to the investment community, however. They will be more focused over the next nine months on how quickly TI can get regulatory approval and how soon it can complete the integration to realize the promised gains from improving sales for National products.

5 comments on “TI’s $6.5B Offer Rescues National From Humdrum Growth

  1. Anand
    April 5, 2011

    Bolaji,

      Thanks for the article. TI has been doing some smart acquisations since last year. Last year when everyone were worried about recession TI went ahead and bought RFAB. Now it has acquired NSC. These are some very good moves by TI. Do you think this deal will force INTEL and SAMSUNG to press panic button?

  2. AnalyzeThis
    April 5, 2011

    I think this deal is a good move for TI. However, the success of the transaction is going to rely heavily on how easily and quickly the regulatory hurdles are cleared, and also by what kind of job TI does to manage the integration.

    As you mention, TI doesn't have a great deal of experience in managing large acquisitions such as this one. So there is the risk of them coming in, wielding too big of an axe, and destroying some of the long-term value that they expected to get out of this transaction.

    However, I'm optimistic that things will work out and I think this deal makes a whole lot of sense, especially right now.

  3. eemom
    April 5, 2011

    This could be a very risky move on TI's part but if everything goes as they hope, they will reep the benefit of the risk taking. Merging two large companies like TI and National is not without significant hurdles. How much overlap they have and what this will mean in term of job loss remains to be seen. Even if this takes a few months to go through, it may be a couple of years before the dust settles.

  4. elctrnx_lyf
    April 7, 2011

    Acqusition of National semi by TI took me completely surprise. No one has made any guess or pre notion about this acqusition. But this is going to be a monster to manage. National has power and TI has power, but national have much more analog components than TI. But one more question is “Is this a good news for employees of National”? I think there will be some downsizing .. atleast in the sales force and later in the engineering force.

  5. Mr. Roques
    April 11, 2011

    Very interesting analysis. It definitely makes sense to invest now, when interest rates are low and the opportunity cost is also low – the ROI might be the lowest in quite some time.

    Regarding the merger itself, I have my reservations on how they will integrate both companies and how long will they keep them running simultaneously. If done right, ok but there's a big chance something goes wrong and they can't create the synergy they might want.

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