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Why Cowen’s Analysts Favor Texas Instruments-Maxim Merger

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Consolidation in analog IC market

In the previous part of the series, we discussed how Texas Instruments (TXN) has a balanced cash and debt position and a strong cash flow. The company’s Analog IC (integrated circuit) segment is also undergoing consolidation.

Meanwhile, peer ON Semiconductor (ON) acquired Fairchild in November 2015. Microchip (MCHP) acquired Atmel in January 2016, and recently, Analog Devices (ADI) acquired Linear Technology (LLTC).

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Cowen analysts tout a Texas Instruments-Maxim merger

Texas Instruments’ last major acquisition was of National Semiconductor in 2011. Analysts at Cowen have urged TXN to reignite acquisition talks with Maxim Integrated Products (MXIM), which were stalled in December 2015 due to a pricing dispute. Cowen stated that this is the right time for TXN to start talks because interest rates are low.

Cowen’s analysts made a comparison to the ADI-LLTC deal, in which ADI agreed to pay a premium of 24% to LLTC shareholders. This valued the cash-stock deal at $14.8 billion. Cowen stated that Maxim’s shares are currently hovering at around $40–$41, and if TXN agreed to pay a 35% premium, it would equate to a $55 per share of MXIM.

What would the finances of a possible TXN-MXIM deal look like?

From another aspect, Maxim has an enterprise value of ~$10.6 billion. A 35% premium on this amount would equal ~$14.3 billion. Maxim has a cash reserve of $1.8 billion, which would reduce the deal value to ~$12.5 billion.

Cowen stated that a Maxim acquisition would increase TXN’s fiscal 2017 and 2018 earnings by percentage points in the low teens, and the company’s debt-to-equity ratio would likely increase to 1.5. Cowen added that instead of returning a huge portion of the ~$3 billion annual FCF (free cash flow) to shareholders, TXN could use it to repay debt.

Cowen said that “to date and again most recently, TXN has argued that it prefers to buy back its own stock at ~5% FCF yield (at current prices), but a deal with MXIM would seem to potentially present a higher return albeit with some but not overly challenging deal execution risk.”

BMO Capital Markets oppose Cowen’s view

But BMO Capital Markets has a different opinion. BMO Capital Markets analyst Ambrish Srivastava stated that Texas Instruments’ current strategy of diversifying in high-margin markets and returning a significant amount of FCF to shareholders would serve the company’s stock well. Srivastava said that the company does “not believe that TI necessarily needs to make an acquisition anytime soon to achieve the earnings potential that we believe the company is capable of.”

Without a doubt, growth through acquisition is currently dubious, but what has been confirmed is Texas Instruments solid guidance for fiscal 3Q16. We’ll look further into this guidance in the next part of the series.

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