Dear TI, the Deal Clock Is Ticking: Brooke Sutherland

Texas Instruments is smart to bide its time on making an acquisition -- as long as it doesn’t wait too long.

The world’s biggest maker of chips that regulate electronics has been notable by its absence from this year’s $76 billion semiconductor deal rampage. Texas Instruments has been wary of large, expensive transactions after taking analyst flack about overpaying in its last big deal -- the $6.5 billion purchase of National Semiconductor in 2011.

The 75 percent premium that Texas Instruments offered for National Semiconductor still ranks as one of the richest ever in the industry. But this year’s buyers are getting close to topping it.

Skyworks Solutions agreed earlier this month to buy PMC-Sierra at an almost 70 percent premium to its average share price in the 20 days before Bloomberg News reported it was exploring a sale. The biggest semiconductor acquisitions of the year have commanded a median multiple of 27 times Ebitda. That’s more than double the median for deals in the previous five years.

With those kinds of valuations, Texas Instruments is spending its cash on buybacks and dividends instead. The company announced in September that it was adding $7.5 billion to its share repurchase plan and raising its quarterly payout to investors by 12 percent. 

Shareholders seem to like its financial astuteness: The company’s stock has climbed 24 percent in the 12 months through Thursday, outpacing the 15 percent gain for the Philadelphia Semiconductor Index.

The risk of waiting out a deal feeding frenzy, though, is becoming the odd man out with no good targets left to buy. 

The semiconductor industry is driven by scale. Texas Instruments is safe to a certain extent because it’s already the biggest in its field, but its rivals -- including NXP Semiconductors and Analog Devices -- are either getting bigger or at least thinking hard about it.

NXP agreed in March to buy Freescale Semiconductor for about $16.7 billion including debt. With more than $10 billion in revenue between the two, NXP will move within striking distance of the about $13 billion in revenue that Texas Instruments brought in last year and become a much stronger competitor in the market for analog chips. 

Analog, meanwhile, looks ready to follow NXP’s lead, with Bloomberg News reporting this week that the company is in talks to combine with $11 billion chipmaker Maxim Integrated Products. Combined, the companies would have more than $5 billion in revenue.

With its rivals getting bigger and stronger, Texas Instruments is going to have to respond and enter the deal fray again if it wants to remain on top. 

Competing with Analog for Maxim would be expensive. At about 19.5 times Ebitda, Maxim is pricier than all but a few other semiconductor peers valued at more than $5 billion. There are still some reasonably priced targets, though.

Linear Technology is roughly the same size as Maxim and trades at closer to 13 times Ebitda. Fairchild Semiconductor -- a $1.9 billion chipmaker that’s exploring a sale -- has a multiple of about 13 times as well.

Might be worth a look, Texas Instruments.

(This column does not necessarily reflect the opinion of Bloomberg LP and its owners.)

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