Monday, April 4, 2011

Initial thoughts on Texas Instruments acquisition of National Semiconductor

While I cannot explain the 78% premium that Texas Instruments has agreed to pay for National Semiconductor, we can reasonably assume that they knew what it would take to get the deal done. As recently as January, dissident shareholder Ralph Whitworth and Relational Investors held 20.6M National shares (8.61% of outstanding) at basis of $16.29. The fundamental value in National Semiconductor is their position in Analog integrated circuits which are the highest margin (>60% GM) and longest lifetime (often > 20 years) products in the semiconductor industry. The market leaders are shown in a recent Analog Devices SEC 8K filing.

The hindsight is easy.  ADI, Maxim and Linear Technology closed today a P/E premium 30-300% compared to National.  Over the past eight years, National refocused on margins over top-line growth and shed many their less profitable endeavors.  TI and National have highly compatible business and technology cultures, where the second generation analog companies like Maxim and Linear could be very difficult to integrate.

I'm a bit of a broken record on the point, but the semiconductor industry is now 50 years old and consolidation will be a strategic play throughout the supply chain, from wafer fabrication all the way through distribution and logistics.  In the analog space, I own Intersil due to their technology, team and chosen markets and have long advocated that someone buy Micrel and tug that company out of the 1980's and into the new millennium.  I don't bet on M&A plays, but for the under appreciated analog companies wallowing at P/E's below 15, this news will be a welcomed boost!  

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