3rd UPDATE: Texas Instruments To Buy National Semi For $6.5 Billion

Texas Instruments Inc. (TXN), in a move to expand its analog chip business, agreed to buy National Semiconductor Corp. (NSM) for about $6.5 billion in cash, a lofty 78% premium to the company's current valuation.

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. Texas Instruments has targeted analog as a key growth area, and the industry has seen demand bounce back following a steep falloff during the recession.

Texas Instruments said the analog market was $42 billion in 2010. Texas Instruments had $6 billion in analog sales, or 14% of the market, the company said, while National Semiconductor had $1.6 billion, or 3% of it.

The Dallas company expects the deal to accelerate its expansion in the industrial market through National Semiconductor's strong position in power-management semiconductors and other chips, Texas Instruments Chairman and Chief Executive Rich Templeton said during a conference call to discuss the deal.

"The bottom line is the combination of TI and National Semiconductor means we can engage with customers in application segments where we have no or minimal engagement today," Templeton said. The combined sales team will be 10 times larger than National's is today, he added.

Gregg Lowe, senior vice president of Texas Instruments' analog business, told Dow Jones Newswires that the company has no plans to lay off employees from the areas of engineering, manufacturing, product groups and sales, but there could be some layoffs in corporate general and administrative.

"The focus and the strategic rationale for the transaction is really one based on growth and opportunity," he said.

National Semiconductor Chief Executive Don Macleod said in an interview with Dow Jones Newswires that it hasn't yet been determined if he will remain with the combined company after the deal closes.

He said during the call that National Semiconductor wasn't looking to be bought but was approached by Texas Instruments. The two companies are complementary in their technology and end markets, he said, and have minimal overlap.

Texas Instruments agreed to pay $25 per share for National Semiconductor of Santa Clara, Calif., shares of which ended Monday at $14.07. The companies said they expect the deal to close in the next six to nine months.

The agreement pushed National Semiconductor shares up 73% to $24.31 in after-hour trading. Over the past 12 months, National Semiconductor has traded between $11.84 and $16. Meanwhile, shares of Texas Instruments slid 1.6% to $33.55 in after-hour trading.

The deal also helped lift other chip maker's stocks. Following the acquisition announcement, shares of analog chip makers Analog Devices Inc. (ADI) rose 4.4%; Linear Tech Corp (LLTC) was up 2.8%; and Maxim Integrated Products Inc. (MXIM) rose 5.1%.

The acquisition should add to Texas Instruments's earnings within a year, excluding the costs of the transaction, Templeton said. The deal also should help Texas Instruments's margins, he said, and generate cost savings at a $100 million annualized run rate starting a year from the deal's close.

In addition, Templeton said, National Semiconductor eventually should be able to grow its analog revenue at the same rate as Texas Instruments. TI, on average, generates analog revenue growth at twice the market average, he said. And Templeton expects the return on the National Semi deal to exceed the cost of capital to buy the company within three to four years.

Texas Instruments expects to have about $3 billion to $4 billion in debt from the deal, depending on the close date, Chief Financial Officer Kevin March said.

"This is a deal that makes sense financially and operationally," said Gleacher & Co. analyst Doug Freedman, adding that many of the company's sales people are located near one another. The companies share some of the same customers, he said, and their chips often end up next to one another in various products.

"It's a great way to consolidate a lot of customers under the TI umbrella," Longbow Research analyst JoAnne Feeney said. "Their ability to absorb National Semi's product line will help further develop their relationships with customers."

Texas Instruments has been increasing its focus on highly profitable analog and embedded-application chips while winding down its business selling mobile baseband chips after major cellphone makers shifted to a multisupplier strategy. The company also has been using its ample cash to buy other companies, build plants, and beef up its sales and engineering forces in China and India.

-By Shara Tibken, Dow Jones Newswires; 212-416-2189; shara.tibken@dowjones.com

--Nathan Becker and Corrie Driebusch contributed to this article.

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