This spring's shaping up to be a robust mating season for technology companies.
First, Western Digital (NYSE: WDC) made a $4.3 billion acquisition of Hitachi Global Storage Solutions. Then AT&T (NYSE: T) and T-Mobile announced a truly monstrous merger for $39 billion. Now, venerable National Semiconductor (NYSE: NSM) will sell itself to even-more-venerable Texas Instruments (NYSE: TXN) for $6.5 billion in cash. This number represents a Brobdingnagian premium of 78% above last Tuesday's closing price for National. Let's investigate why TI is willing to pay so handsomely for this old-school chipmaker.
High-tech types rarely toss around the word "analog" in these digital times. However, analog semiconductors are very big business -- to the tune of $42 billion annually -- and play a critical role in the devices on which consumers and businesses have come to rely. Because digital chips can only interpret signals in discreet values of "on" and "off," analog chips become necessary to process and convert more organic input such as the human voice. They also play the most important part in regulating the power of devices; these days, squeezing every last drop out of your portable device battery is essential.
TI knows this better than anyone. As the leader in analog semiconductors, it long ago recognized the virtue of this high-margin business, which now accounts for 43% of TI's revenue. From an industry perspective, that's about 14% of the fragmented analog chip business. National will bring in another roughly 3% piece of the analog game, which translates to around $1.5 billion a year.
TI CEO Rich Templeton has touted the buy as a move toward "strength and growth," as opposed to boring old industry consolidation. After a 20% increase in TI's analog sales in the fourth quarter of 2010, National Semiconductor could be a golden goose of an investment for TI, powering outsized returns if lower and lower power consumption continues to be an aphrodisiac to portable device makers. Better yet, it might also increase TI's dominance in a highly profitable and specialized industry.
If you wish to speculate on National's fate until the deal closes, exercise caution. Few rival semiconductor companies have TI's quantity of cash, and the specialized nature of the analog chip industry demands an equally specialized suitor. TI and National Semiconductor are a match made in heaven.
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