Can the Analog-Maxim Merger Take On Texas Instruments?

Semiconductor maker Analog Devices Inc. (NASDAQ: ADI) announced Monday that the company will acquire Maxim Integrated Products Inc. (NASDAQ: MXIM) in an all-stock transaction that values Maxim at around $20.9 billion. The tax-free transaction is expected to close next summer.

Analog Devices values the deal at $68 billion, based on current enterprise values of around $51 billion for Analog and $17 billion for Maxim. The acquisition narrows the gap between Analog and Texas Instruments Inc. (NASDAQ: TXN), which has an enterprise value of around $121.6 billion.

Analog and embedded chips have risen from a rather neglected corner of the semiconductor market to a more prominent role in newly hot sectors like the Internet of Things and autonomous vehicles, although sales of analog and embedded chips cooled off last year.

Texas Instruments saw sales dip by 5% year over year to $10.2 billion, about 19% of the total $55 billion market for analog semiconductors. Analog Devices was number two in sales with $5.2 billion (a drop of 6%) and a 10% share. Maxim’s analog sales dropped 13% last year and the company ranked seventh in sales with a total of $1.85 billion and a 4% share of the market.

Maxim shareholders will receive 0.63 shares of Analog stock for each share of Maxim they own. Once the transaction is completed, Analog’s shareholders will own about 69% of the combined company. Shareholders of both companies must approve the deal and regulatory approvals are also needed.

Analog CEO Vincent Roche will head the combined company and two directors from Maxim will join the Analog board. One of those will be Tunç Doluca, the current Maxim CEO.

Commenting on the agreement, Roche said, “Maxim is a respected signal processing and power management franchise with a proven technology portfolio and impressive history of empowering design innovation. Together, we are well-positioned to deliver the next wave of semiconductor growth, while engineering a healthier, safer and more sustainable future for all.”

On a pro forma basis, the combined company generated about $8.2 billion in revenue last year and $2.7 billion in free cash flow. The pro forma free cash flow margin was 33%. The deal is expected to boost earnings per share about 18 months after closing along with cost savings of $275 million by the second-year.

In a presentation for investors, Analog noted that it plans to return 100% of free cash by maintaining annual dividend growth of 7% to 15% and through share buybacks.

Shares of Analog Devices traded down about 1.8% early Monday, at $122.27 in a 52-week range of $79.08 to $127.39. The stock’s consensus 12-month price target is $129.71. Analog pays an annual dividend of $2.48 (yield of 1.99%).

Maxim Integrated Products stock traded up about 13% to $72.50, in a 52-week range of $41.93 to $72.84. The stock’s price target is $59.71, and Maxim pays a dividend of $1.92 (3.00% yield).

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