Investopedia: Texas Instruments Takes A Big Swing

Texas Instruments (NYSE:TXN) had been on something of a roll for a while, gaining share in markets like amplifiers, power management and so on, and getting slots in products like the Apple (Nasdaq:AAPL) iPad. On top of that, deals in the analog chip space are relatively rare as chip architectures tend to be proprietary and there is a lot of market overlap. 

So, of course it stands to reason that TI would do the unexpected and step up with a $6.5 billion bid for rival analog player National Semiconductor (NYSE:NSM). 

The Terms of the Deal  

Under the deal announced late on Monday, TI will pay National Semiconductor shareholders $25 in cash for each of their shares. That represents a 78% premium and a generous valuation. How generous? TI's bid values NSM at a P/E of 20-times and an EV/sales of 4.2 - well ahead of the blended averages of leading players like Analog Devices (NYSE:ADI), Linear Technology (Nasdaq:LLTC) and Maxim (Nasdaq:MXIM). (For more, see Mergers And Acquisitions: Valuation Matters.)
What TI Is Getting  

Why would TI do this deal? With National Semiconductor in the fold, Texas Instruments will have a compelling power management business, particularly as TI has generally done best in the computer and handset markets, while NSM has been stronger in the industrial markets. This is not an encouraging development then for the likes of Maxim or ON Semiconductor (Nasdaq:ONNN). That said, customers will often tap at least two suppliers (one as primary and one as back-up), and there could be some incremental business to be had among those customers who already use TI and NSM and will need a new back-up. 

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Investopedia: Linear's Ups And Downs

For long-term shareholders, Linear Technology (Nasdaq:LLTC) is anything but linear. Although this company has a phenomenal record of producing top-notch margins, returns on capital and free cash flow, the reality is that the analog semiconductor business is cyclical and even a top operator cannot do anything about that. With disappointing (albeit not completely surprising) fiscal third quarter guidance, semiconductor investors are left wondering what 2011 will hold for the sector. 

The Quarter That Was
While it will likely be overshadowed by the guidance, Linear's reported second quarter results were actually quite good. Revenue fell 1% sequentially (and rose 50% annually) and beat the average estimate on the Street. Strong Apple (Nasdaq:AAPL) iPad sales no doubt helped, but the ongoing recovery in the industrial and automotive markets were more significant.

The company also did a solid job (as it almost always does) on profitability. Gross margin was flat sequentially at 78.5%, but up about 250 basis points from the year-ago level. Operating income did drop 2% sequentially (and jump 74% annually), but this was better than expected. At the bottom line, the company beat estimates, even after excluding a boost from lower taxes. (For more, see The Bottom Line On Margins.)

The Rocky Road Ahead
Although Linear's second quarter was solid, its is likely that guidance for the third quarter will dominate the story. While the Street had been expecting a 1-2% sequential decline, the company announced that revenue would fall 6-10% instead. There appear to be two primary causes for this negative outlook.


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