CHICAGO, April 6, 2011 /PRNewswire/ -- Zacks.com announces
the list of stocks featured in the Analyst Blog. Every day the
Zacks Equity Research analysts discuss the latest news and events
impacting stocks and the financial markets. Stocks recently
featured in the blog include: Texas Instruments Inc.
(NYSE: TXN), National Semiconductor Corp (NYSE: NSM), Linear
Technology Corp (Nasdaq: LLTC), Semtech Corp (Nasdaq: SMTC) and
Analog Devices (NYSE: ADI).
(Logo: http://photos.prnewswire.com/prnh/20101027/ZIRLOGO)
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Here are highlights from Tuesday's Analyst Blog:
TI Snaps Up National Semiconductor
Texas Instruments Inc. (NYSE: TXN) or "TI"
has announced its intention to acquire National Semiconductor
Corp (NYSE: NSM) for $6.5 billion
in cash. Counter-bids look unlikely, given the 78% premium TI is
willing to pay that most prospective buyers would shy away
from.
The transaction is subject to the usual regulatory approvals (in
this case across 10 countries). Therefore, it may not close for
another six to nine months. We therefore do not expect much
variation in estimates for the next few quarters, although
estimates for 2012 are likely to go up. There is significant
fragmentation in the market and competition is stiff, so regulatory
approval is unlikely to be denied.
TI intends to operate National as a separate unit under its
analog segment, which would then comprise high performance analog
(HPA), high volume analog and logic (HVAL), power management and
National Semiconductor. As a result of the acquisition, analog
would account for around 50% of TI's business.
The acquisition is expected to be accretive to TI's earnings in
the first full year of operation.
Rationale for the acquisition
We think the deal makes sense for TI for a number of
reasons.
First, it gives TI a larger share of the analog market.
TI was already one of the largest players with its 14% share and
the addition of National brings another 3% for a combined share of
around 17%.
Second, TI has for long been focused on the wireless side of the
business and its analog chips are primarily focused on the
communications and computing markets. With the acquisition of
National Semiconductor, TI would be able to boast a well-rounded
portfolio, since the industrial market (mostly power
management devices) accounts for almost half of National's
revenue.
Also, while a significant portion of National's business comes
from mobile and communications markets, management of both
companies were of the opinion that product overlap was minimal. The
addition of the industrial business to TI's portfolio is also a
positive in terms of profits, because industrial applications
typically generate higher margins.
Third, National's sales force is much smaller than TI's
and the company's innovative products have not been marketed
effectively. The combined sales force is better equipped to carry
out the function, so growth rates at National's business should
accelerate. This would mean higher growth rates for the combined
entity, possibly enabling TI to replace the baseband business,
which will be completely phased out by the end of 2012.
Fourth, National's fabs (none of which are located in
tsunami-affected Japan) are
currently running at a 60%+ utilization rate, so there is
sufficient capacity to generate additional revenue if the marketing
effort is fruitful. TI has stated that there will be no
requalification or obsolescence of parts, or part number changes,
or even changes to National's product roadmaps. This should be
heartening for customers.
Fifth, identified cost synergies are around $100 million (annualized). While this is not a
significant amount, it is something. Moreover, integration costs
will be low, as TI will run National as a separate unit.
However…
There is a flip side as well.
The greatest "negative" that immediately comes to mind is
indebtedness. TI has so far had a pristine balance sheet.
However, in order to fund the acquisition, TI would need to raise
some debt (it has over $3 billion in
cash and short-term investments and some available funds under a
revolving facility). National also had a net debt position of
$165.6 million at the end of its
fiscal third quarter ended February. However, we are not overly
concerned, since we expect the company to continue generating solid
cash flows that would easily allow interest charges.
TI intends to focus on growth for the National business and for
this reason it might decide to slash prices. National's
growth has been dwindling in the recent past, as the company stuck
to its higher prices. However, if TI decides to take down prices to
help growth, there would naturally be a negative impact on
margins.
It will take 3-4 years for the return on capital invested to
exceed the cost of capital. This is quite some time. Also,
TI is banking on the National business growing at the same rate as
TI's, based on the belief that the TI sales force is now extremely
effective at marketing analog products. If results fall short of
these expectations, the payback period could stretch out. Given
TI's track record, we are not overly concerned about this.
To Conclude
TI's intention to acquire rival analog company, National
Semiconductor in an all-cash deal is likely to be beneficial for
both companies, although synergies will largely be on the revenue
side. Given the premium that TI has offered to pay, we expect the
shares to be under some pressure in the near term. National's share
prices on the other hand will hover around the $25 mark that TI will be paying.
TI shares currently bear a Zacks #3 Rank, similar to analog
peers Linear Technology Corp (Nasdaq: LLTC), Semtech
Corp (Nasdaq: SMTC) and Analog Devices (NYSE: ADI).
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