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Beware of all enterprises that require new clothes.-- Thoreau

National Semiconductor Acquires Cyrix
by Randy Befumo (TMF Templr)

ALEXANDRIA, VA (July 29, 1997)/FOOLWIRE/ -- With yesterday's purchase of CYRIX CORP. (Nasdaq: CYRX), NATIONAL SEMICONDUCTOR (NYSE: NSM) has decided to move up the semiconductor food chain and compete directly with INTEL CORP. (Nasdaq: INTC). The deal gives Cyrix shareholders 0.825 shares of National Semiconductor for each share of Cyrix they hold, valuing the entire deal at $529.8 million including Cyrix's current cash and debt. Best known for competing in specialty or niche markets, the Cyrix acquisition represents what some might call a shift in National's operating strategy.

Given National's focus on "system-on-a-chip" applications for low-cost personal computers and network terminals, the deal is not a complete departure for National. Cyrix's February 20th announcement of the MediaGX microprocessor put the company in the same niche as National. Compaq's decision to use the MediaGX product in its Presario 2000 Series made the small central processing unit manufacturer even more attractive to a company like National that wanted to enter that market, as there was a pre-existing deal to supply the largest PC-manufacturer on the planet. Whether or not National also decides to push Cyrix's high-end 6x86 chip and go head-to-head with Intel remains to be seen, although in a conference call held today, Cyrix management stressed that it would remain competitive in this area.

The deal bails Cyrix out of what many analysts believed was a tenuous position, as the company has never had enough capacity to manufacture its chips and has never really generated enough revenues to cover the high cost structure its business requires. By being folded into the National Semiconductor umbrella, Cyrix may actually become break-even with its current revenues, whereas on its own it lost $0.27 per share last quarter. As Cyrix's MediaGX combines audio, video, and system logic functions on one chip, now that the company has National's proven manufacturing ability to back it up, computer manufacturers looking to make machines that cost less than $1000 may be more willing to try the company's chips. As a Fortune 500 company that supplies some of the largest manufacturers of networking and consumer electronics stuff, National is not a lightweight and brings a lot of credibility to the table.

The negative for investors is that the deal will be "dilutive" to earnings in the third and fourth quarters, meaning that they will not be as high as previously estimated because of the number of shares being issued. What has happened is that National has paid a higher valuation for the Cyrix's earnings than the market currently gives National earnings, "diluting" the combined company's earnings with more shares outstanding. The company does believe that the Cyrix acquisition will be "accretive" going into fiscal 1999, meaning that it will make the combined company earn more than National would have been able to earn on its own. This means that National will probably make around $1.60 EPS in '98 and $2.40 EPS to $2.50 in '99 given the 10% share dilution in '98.

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