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Analysis: TI-National deal a smart use of cash

Posted: 06 Apr 2011 ?? ?Print Version ?Bookmark and Share

Keywords:acquisition? analog? IC? market? semiconductor industry?

Texas Instruments is not known for making huge acquisitions. Until April 4, the last time it rocked the market with anything close to or above $1 billion was in 2000 when it acquired Burr-Brown for an eye-popping $7.6 billion. Following that transaction, TI settled into organic growth while gobbling up the occasional bite-size transactions meant to fill product lines on a steady basis.

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

So why is TI making its biggest acquisition in more than a decade by offering to buy analog rival National Semiconductor for $6.5 billion in cash? After all, the transaction will increase TI's market leverage, and likely attract some regulatory scrutiny, which the company should withstand easily. However, the deal will result in some integration distractions for Dallas-based TI, distractions that rivals will try to exploit in order to negate some of the gains both companies are expecting from the deal.

While some industry observers and financial analysts may question TI's decision to pay $6.5 billion for a struggling rival with less than $1.5 billion in annual sales (for fiscal 2010 sales were $1.42 billion), TI can point to several advantages from the transaction. These include the opportunity to boost National's revenue by deploying its highly motivated sales force, add about 12,000 new products to its portfolio along with seasoned, scarce analog engineers and reach new markets. The result will be increased leverage in the analog market.

Furthermore, TI is wisely deploying cash at a time of low returns from investment markets. Cash on most companies' balance sheets today is generating meager returns whether from U.S. Treasury, corporate or municipal bonds along with overseas investments. Keeping more than $3 billion on the balance sheet might make sense for companies with limited ability to generate additional cash flow or that need it for capital expenditures, but this is not a problem at TI. In addition, the chip maker will be tapping the investment market for financing at a time of low interest rates. The result is likely to be rapid, strong returns on the investment.

It's a move few analysts quarrelled with during a conference call with TI executives to discuss the transaction. Indeed, many analysts offered congratulations to Templeton although a few had tough questions about timing, 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. Customers will also need to be reassured of regulatory approval, which would involve as many as 10 different international regulatory agencies, according to TI officials. During the expected six- to nine-month review period, the fate of National's products will be in limbo, and customers may move on rival suppliers. Winning these customers back may be difficult.

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