Texas Instruments Gains Analog Leverage With Natl Semi Buy

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By Shara Tibken 
   Of DOW JONES NEWSWIRES 
 

NEW YORK (Dow Jones)--Texas Instruments Inc.'s (TXN) pricey $6.5 billion deal to buy National Semiconductor Corp. (NSM) strengthens the company's analog chip holdings, but questions remain as to how disruptive the merged entity will be to the $42 billion analog market.
The deal adds 12,000 products to Texas Instruments' analog business, which will now represent more than half of the company's revenue. The combination of National Semiconductor will enable TI to compete better in areas that it is currently not strong, such as industrial power management, which comprises about half the total analog market, according to one research firm.
"Analog and particularly analog catalog portfolios take a long time to build," said Texas Instruments Chairman and Chief Executive Rich Templeton. "In any given year, TI introduces about 500 new analog products. With this acquisition, we add 12,000 products all at once."
He said National Semiconductor's exposure to the industrial market will benefit TI, whose power-management products are geared more toward portable devices.
"The bottom line is that the combination of TI and National means we can engage with customers in application segments where we have no or minimal engagement today," Templeton said.
Analog chips--which take real-world signals, such as sound and light, and convert them to digital signals--are used in products ranging from cellphones to industrial equipment.
Among those power-management companies that could feel pressure from a combined TI and National Semiconductor include Microchip Technology Inc. (MCHP), STMicroelectronics NV (STM) and Power Integrations Inc. (POWI). Other large analog companies like Analog Devices Inc. (ADI), Maxim Integrated Products Inc. (MXIM) and Linear Technology Corp. (LLTC) also could feel heighened competition.
Texas Instruments' acquisition of National Semiconductor creates a "analog power house" with a "substantial advantage" in the marketplace, Cowen & Co. analyst John Barton said as he downgraded his rating on Analog Devices and Maxim to neutral from outperform.
However, analysts note, it is hard to displace rivals quickly in the analog market because customers tend to have longstanding relationships with their chip companies and usually have little need to displace them.
TI, though, sees cost savings of $100 million on an annualized run rate from the merger simply from consolidating the company's sales forces and cross-selling each company's products. Also, TI said that because the companies have parts that fit together easily, it expects the deal to add to earnings quickly.
"The numbers work," Templeton said. "I've always said that we would not enter into a sizeable acquisition unless it made us a better, stronger supplier to our customers and that the numbers made sense both near term and long term."
The deal is not expected to prompt consolidation in the analog sector, though many stocks were getting a boost on hopes for more merger activity. Intersil Corp. (ISIL) jumped 10%, while Semtech Corp. (SMTC) grew 7.4%.
Because of the cyclical nature of the chip industry, and the perennial need to invest in new equipment, semiconductor companies tend to carry a lot of cash on their books. This forces potential acquirers to pay a hefty premium on any deal. For example, TI's offer price was 78% above National Semiconductor's current valuation.
Many analog companies "are probably too well-capitalized to be easy absorption targets," Gartner analyst Steve Ohr said.
In addition, IDC analyst Mali Venkatesan said mergers between larger analog companies don't happen often because of the competitive nature of the business.
"I don't think in the tech field, especially the analog or the chip business where innovation continues to be a pretty important factor, that there is necessarily some force of consolidation," Texas Instruments' Templeton said.
-By Shara Tibken, Dow Jones Newswires; 212-416-2189; shara.tibken@dowjones.com