Texas Instruments’ Acquisition of National Semiconductor


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Texas Instruments’ Acquisition of National Semiconductor

  1. 1. 1 Texas Instruments’ Acquisition of National Semiconductor
  2. 2. 2 Agenda About the Companies Industry Analysis Transaction Details Pros and Cons of the Deal Valuation (Relative and DCF) The Synergies Involved Integration procedures How have the synergies evolved?
  3. 3. About the Companies An American company that designs and makes semiconductors, which it sells to electronics designers and manufacturers globally 3rd largest manufacturer of semiconductors worldwide, the 2nd largest supplier of chips for cellular handsets, and the largest producer of Digital Signal Processors (DSPs) and analog semiconductors Revenue: USD 12.82 billion (2012) After the acquisition of National Semiconductor in 2011, TI became the world’s largest maker of analog technology components It was an American semiconductor manufacturer, that specialized in analog devices and subsystems Their products included power management circuits, display drivers, audio & operational amplifiers, and communication interface products Revenue: USD 1.42 billion (2010) National's key markets included wireless handsets, displays and a variety of broad electronics markets, including medical, automotive, industrial and test & measurement applications In September, 2011, the company formally became a part of Texas Instruments as the "Silicon Valley" division 3
  4. 4. 4 Analog Industry Analysis (2010)  Within the semiconductor industry, the analog segment had been remarkably profitable and stable till 2010  The analog sector, though maturing, was on the verge of significant changes, based on existent supply and demand. New competitors were expected in the segment as demand continued to heat up and diversified across segments and applications simultaneously, and shortages increased in duration and further tightened the marketplace while increasing revenue opportunities •Projection of the analog segment to grow twice as fast as the semiconductor market (2010-14)Strong Growth •Analog players exhibit gross margins of 40 to 70% — generally higher than margins obtained in the digital segment (lower capex)Healthy Margins •The heterogeneity of products, process technologies and applications creates opportunities for various companies and prevents an oligopoly Opportunities for various companies •Market share for most analog players had remained relatively constant over the last decade (2000-10)Stability in the industry •Several industry players were in the process of establishing capacity of 300 mm wafers, which would lead to a 20-30% reduction in front-end manufacturing costs Transition from 200 mm to 300 mm wafers Evaluation of the Analog subsector Source: ‘Will analog be as good tomorrow as it was yesterday?’ (2010) by Mahindroo, Rosensweig and Wiseman
  5. 5.  On 4th April, 2011, Texas Instruments Inc. (TI) agreed to acquire its rival National Semiconductor Corp. (NSM) for USD 6.5 billion in cash  The deal united two of the most venerable names in the industry at the time  TI agreed to pay USD 25 for each share of National Semiconductor, a hefty premium of 78% over NSM’s closing price of USD 14.07 the previous day  The purchase was funded with a combination of existing cash balances of USD 3.07 billion and newly issued debt  Morgan Stanley provided USD 2.5 billion in a bridge loan to TI About the Transaction 5 NSM: $14.07 to $24.45 (74%) TI: $36.63 to $34.11 (1.5%) Stock Price Movement on the day of the deal Announcement 4th April, 2011 – Deal announced 23rd September, 2011 – Deal closed Important Dates
  6. 6. 6 Pros and Cons of the Deal before the Announcement  TI would reverse its sales slump and profit from NSM’s higher margins  The deal reaffirmed TI’s commitment to analog chips (NSM’s specialty). With NSM, TI could now add new analog products faster than it could on its own  TI would get the opportunity to boost National’s revenue by deploying its highly motivated sales force  TI would get to add about 12,000 new products to its portfolio along with seasoned, scarce analog engineers and reach new markets  TI would put to good use the USD 3 billion surplus cash on its balance sheet. Surplus cash was generating very meager returns at the time  Since TI would be tapping the investment market for financing at a time of low interest rates, it would result in rapid, strong returns on the investment  NSM’s sales had been declining for the past 4 fiscal years, presenting a major challenge for TI. NSM was a struggling rival, with less than USD 1.5 billion in annual sales  A 78% premium seemed way too much, according to several analysts  The transaction would increase TI’s market leverage and attract regulatory scrutiny  TI, a zero-debt company, would be taking on debt to finance the deal  Integration of NSM personnel into TI posed a challenge The Advantages The Disadvantages and Challenges As the various benefits to TI outweighed the disadvantages and challenges, TI went ahead and announced its acquisition of NSM on 5th April, 2011
  7. 7. 7 Valuation of National Semiconductor (1 of 2) 2010 Gross Margin 2010 Operating Margin 2010 Growth 3/31/2011 Market Cap P/E (ttm) P/S (ttm) National Semiconductor 69% 30% 27% 3.50 11.30 2.30 Linear Tech 78% 52% 61% 7.60 15.40 5.30 ADI 66% 35% 35% 11.80 14.80 4.10 Maxim 61% 26% 40% 7.60 31.20 3.30 Average (Linear Tech., ADI, Maxim) 68% 38% 42% 9.00 20.47 4.23 National Semiconductor at Offer Price 6.50 20.00 4.10 Relative Valuation  Linear Tech: A member of the S&P 500, has been designing, manufacturing and marketing a broad line of high performance analog integrated circuits for major companies worldwide for three decades  ADI: ADI or Analog, is an American multinational semiconductor company specializing in data conversion, and is a leading manufacturer of analog, mixed-signal and digital signal processing integrated circuits (ICs)  Maxim: Maxim Integrated is an American, publicly traded company that designs, manufactures, and sells analog and mixed-signal semiconductor products Peers Chosen The Valuation of National Semiconductor done (on the basis of Relative Valuation) was almost 2 times NSM’s multiples, but very similar to the industry averages
  8. 8. 8 Valuation of National Semiconductor (2 of 2) Cost of Equity Risk free Rate Assumption 4.30% Fundamental Beta 1.29 Estimated Equity Risk Premium 6.50% Cost of Equity 12.685% After-tax Cost of Debt Risk free Rate Assumption 4.30% Synthetic Credit Spread NA Cost of Debt Assumption NA Tax Rate Assumption 23.00% After-tax Cost of Debt 13.09% Cost of Preferred Stock Preferred Dividends 0 Value of Preferred Stock 0 Cost of Preferred Stock 0 Capital Structure Weight of Equity 37.85% Weight of Debt 62.15% Weight of Preferred Stock 0% WACC 12.94% (All values in million USD except per share price) Intrinsic Value of Capital 3743.10 Intrinsic Value of Common Stock 3467.46 Diluted Shares Outstanding 235.10 Intrinsic Value of Common Stock (per share) 14.75 DCF Valuation RR 0.810 ROIC 58.90% g1 47.71% g2 36.56% g3 25.40% g4 14.25% Perpetual growth rate, g5 3.10% (Million USD) FCFF(i) or Terminal Value PV at 12.94% FCFE (i) or Terminal Value PV at 12.685% Period 1 207.36 183.61 160.93 142.81 Period 2 283.17 222.01 236.73 186.44 Period 3 355.10 246.52 308.67 215.72 Period 4 405.71 249.39 359.28 222.83 Period 5 418.29 227.67 371.86 204.67 Terminal Value 4802.47 2613.90 4533.14 2494.99 WACC = 12.94% Cost of Equity = 12.685% Perpetual growth rate = 3.1% Price Offered: $25.00 Intrinsic Value of NSM: $14.75 Market Price of NSM: $14.07 Premium paid over the Market Price: 77.68% Premium paid over the Intrinsic Value: 69.49%
  9. 9. 2010 Data TI NSM TI + NSM Revenue USD 13.97 bn USD 1.56 billion USD 15.53 billion Gross Margin 53.6% 69.0% 55.2% R&D as a % of Revenue 11.2% 17.9% 11.9% SG&A as a % of Revenue 10.9% 19.3% 11.7% Operating Profit USD 4.51 billion USD 0.47 billion USD 4.98 billion Operating Margin 32.3% 29.8% 32.1% EPS USD 2.62 USD 1.25 USD 2.91 Cash flow from Operations USD 3.82 billion USD 0.41 billion USD 4.23 billion 9 The Synergies Involved (1 of 3)  Visible increase in Revenue, Gross Margin, Operating Profit and EPS when the firms combine  The combined Return on Invested Capital (ROIC) would exceed TI’s cost of capital within 3 or 4 years Financial Synergies Source: Texas Instruments’ investor presentation (2010)
  10. 10. 10 The Synergies Involved (2 of 3) Operational Synergies 43% 15% 9% 12% 21% TI Revenue = USD 13.97 billion (2010) Analog Embedded Processing Wireless Baseband Other 49% 13% 8% 11% 19% TI + NSM Revenue = USD 15.53 billion (2010) Analog Embedded Processing Wireless Baseband Other  The deal accelerates TI’s transformation into a firm focussed on Analog, Embedded Processing and Wireless technologies  The core business of National Semiconductor (Analog) easily aligns with TI’s increasing focus on Analog  The core business (Analog + Embedded Processing + Wireless) would contribute to over 70% of the total revenue (as of 2010)  NSM’s industrial strength would also complement TI’s Source: Texas Instruments’ investor presentation (2010)
  11. 11. 11 The Synergies Involved (3 of 3) The Strategic Rationale  National Semiconductor’s (NSM’s) 12,000 analog products would add to Texas Instruments’ (TI’s) current portfolio of 30,000 analog products, making the combined firm to have a market share of 17% (increase of 3%) in the global vast and fragmented analog market  National's power control chips and the customers for those products will be a welcome addition to the TI product line and customer base  TI, with its large sales organization, aims to remedy NSM’s current insufficient ability of merchandizing its products. NSM’s products would get more sales throughput  The acquisition brought out the world’s first 300 mm analog factory. The factory is equipped with larger wafers and tighter process geometries, which brought about important cost savings  The timing of the deal was perfect because of the state of the semiconductor business and financial markets in 2011  Semiconductor manufacturers like TI were in a good cash position, and TI was using this surplus cash to expand its manufacturing capacity  Debt was also available at a cheap rate, so TI used existing cash and new debt to finance the deal  Overall, the decision to acquire National Semiconductor was a wise decision with moderate synergies taking advantage of the existing market scenarios
  12. 12. 12 Steps taken to ensure a Smooth Integration  Both firms realized the importance of a seamless integration process  Hence, integration was a key focus for both firms, TI and NSM  Product Integration: The focus was not just integration on a chip, but also inductors, FETs, DC/DC converters and so on Key focus on Integration Creation of “Silicon Valley Analog”  “Silicon Valley Analog” was created as a 4th Business Unit (BU) after the acquisition  This structure was designed to make the integration of the teams as simple and seamless as possible so that TI could direct its energy to providing more solutions and engaging with more customers Other measures taken  Technology sharing sessions were held to foster collaboration between both firms’ engineering teams and to accelerate innovation  If product overlap occurred, TI continued to offer both firms’ offerings, so that customers continued to count on TI to make products as long they are technologically capable of doing so. Obsolescence was a last resort at TI  Both firms enjoyed similarities in cultures, so cultural integration was never a problem
  13. 13. 13 How have Synergies evolved? (1 of 2) Financial Component Absolute Value (2012) Remarks Analog Revenue USD 6.998 billion Increased by USD 623 million or 10% due to the inclusion of a full year of SVA Goodwill USD 3.528 billion Other Intangible assets USD 2.96 billion Debt assumed by TI USD 1.105 billion TI assumed outstanding debt from NSM’s books R&D expenses Increased by 9% in 2012 SG&A expenses Increased by 10% in 2012 Interest and debt expenses USD 42 million Put pressure on margins Operating Profit Operating Profit as a % of revenue reduced from 21.8% (2011) to 15.4% (2012) Financial Perspective Source: Texas Instruments’ Annual Report (2012)
  14. 14. 14  Products acquired through the purchase included power management, data converter, interface and operational amplifier catalog analog products, nearly all of which are complementary to TI’s other Analog products  After the acquisition, TI grew its free cash flow to almost USD 3 billion (23% of revenue). This was a direct result of more revenue coming from Analog and Embedded Processing  Ever since the acquisition was completed, TI has gained share in the Analog and Embedded Processing markets, and they have continued to wind down their baseband operations  Revenue from a full year’s inclusion of SVA slightly more than offset lower revenue from Wireless baseband products  TI now has the ability to develop their own process technologies and means that their engineers can get access to state-of-the-art processes for developing their circuits  TI now has the industry's largest analog design team and more than 4 million sq. feet of manufacturing capacity  The National acquisition has given TI a significant footprint in Silicon Valley for the first time. TI is using this opportunity by the opening of TI Silicon Valley Labs and they have tied up with universities (Stanford, Berkeley) to further strengthen key engineering undergraduate programs.  TI’s management has been blown away by the innovative thinking and the kinds of technology that SVA has been developing Strategic Perspective How have Synergies evolved? (2 of 2)
  15. 15. 15 Important References  Texas Instruments’ Annual Report, 2012  Texas Instruments’ Investor Presentation, 2010  National Semiconductor’s Annual Report, 2010  ‘Will analog be as good tomorrow as it was yesterday?’ (2010) by Mahindroo, Rosensweig and Wiseman  http://investor.ti.com/releasedetail.cfm?ReleaseID=607786  Objective Analysis: Semi-Conductor Market Research  http://en.wikipedia.org/wiki/Texas_Instruments  http://en.wikipedia.org/wiki/National_Semiconductor  http://online.wsj.com/article/SB10001424052748703712504576243133367045662.html  http://www.eetimes.com/document.asp?doc_id=1279562  http://www.eetimes.com/document.asp?doc_id=1259147  http://www.telegraph.co.uk/finance/newsbysector/mediatechnologyandtelecoms/electronics/842 8440/Texas-Instruments-to-buy-National-Semiconductor-for-6.5bn.html  http://www.analog-eetimes.com/en/ti-s-integration-strategy-for-national-semiconductor-devices- begins-to-take-shape.html?cmp_id=7&news_id=222902839
  16. 16. 16 Texas Instruments’ Acquisition of National Semiconductor Thank You!