By Aron Adamski, BSc Economics @LSE
OVERVIEW OF THE DEAL:
- Acquirer: Analog Devices Inc. (ADI)
- Target: Maxim Integrated Products Inc.
- Industry: Semiconductors
- Estimated value: $21B
- Financing: All-stock
- Announcement Date: 13/07/2020
- Acquirer Advisors: Morgan Stanley, Bank of America Securities
- Target Advisors: JP Morgan
Both Analog and Maxim make analogue chips which are designed to detect and process signals that travel as a wave through the real world, unlike digital chips which send and receive data only as ones and zeros encoded in electricity. Maxim specialises in chips for cars, healthcare and mobile phones, whilst Analog specialises in chips for communication, military and automotive sector.
Under the terms of the agreement, ADI will acquire Maxim in an all-stock transaction that values the combined enterprise at over $68B and Maxim shareholders will receive 0.63 of of ADI common stock share for each share of Maxim common stock. (a 22% premium on 10/07/2020 close)
Upon closing, current ADI shareholders will own approximately 69% of the combined company, while Maxim shareholders will own approximately 31%.
Under the “Merger Agreement”, Maxim and ADI will be required to pay a termination $725M fee to the other party if the “Merger Agreement” is terminated. For example, if it is terminated because board of directors has changed its recommendation.
The transaction marks a consolidation in the semiconductor sector, as companies prepare themselves for a world where all devices are connected to the internet and many processes are automated.
The transaction is expected to close in the summer of 2021.
COMPANY DETAILS (Analog Devices Inc.):
Analog designs, manufactures and markets integrated circuits, algorithms, software, and subsystems that leverage various signal processing technologies. They serve over 125,000 customers worldwide and their products are used in various types of electronic applications in a variety of sectors:
- Industrial automation: robotics, environmental control systems, weight scales, environmental analyzers
- Military: navigation, satellite communications, radar systems, security devices, electronic surveillance
- Healthcare: ultrasounds, X-ray, surgical tools, blood analyzers
- Automotive: electrification of vehicles, perception and navigation that enable cars to sense external environment
- Consumer: portable devices, audio/video equipment
More facts about Analog Devices:
- Founded in: 1965
- Headquartered in: Norwood, Massachusetts, United States
- CEO: Vincent T. Roche
- Number of Employees: 15,300
- Market Cap: $43.48B
- EV: $48.85B
- LTM Revenue: $5.54B
- LTM EBITDA: $2.3B
- EV/ LTM Revenue: 8.82x
- EV/ LTM EBITDA: 21.24x
COMPANY DETAILS (Maxim Integrated Inc.):
Maxim designs, develops, manufactures and markets various linear and mixed-signal integrated circuits for their customers. The major end-markets in which the company’s products are sold are the automotive, communications and data center, computing, consumer and industrial markets.
- Automotive: infotainment, powertrain, safety and security
- Communications and data centres: data storage, servers, telecom
- Computing: desktop and notebook computers
- Consumer: smartphones, digital cameras, home entertainment
- Industrial: automatic test equiment, financial terminals, medical security, electrical instrumentation
More facts about Maxim Integrated:
- Founded in: 1983
- Headquartered in: San Jose, California, United States
- CEO: Tunc Doluca
- Number of Employees: 7,131
- Market Cap: $18.64B
- EV: 18.01B
- LTM Revenue: $2.2B
- LTM EBITDA: $786.1M
- EV/ LTM Revenue: 8.19x
- EV/ LTM EBITDA: 22.91x
STRATEGIC RATIONALE
SYNERGIES
The deal is expected to be accretive to EPS in 18 months subsequent to closing of the deal, with $275M of cost synergies, driven primarily by lower operating expenses and cost of goods sold. The transaction is also expected to be accretive to FCF, enabling additional returns to shareholders, resulting in improved net leverage of 1.2x.
“With more size, you have a much larger revenue base over which to spread your R&D investment, which gives you higher profitability and higher cash flow” ~ Richard Lane, Moody’s
MARKET SHARE CONSOLIDATION
Semiconductors produced by Analog and Maxim are traditionally the less exciting sibling of digital chips that companies such as Intel make for PCs. However, the demand for these chips has grown in an era of automation. The acquisition will enable the combined group to pool their customer bases and their R&D resources to become a much stronger competitor.
ADI held 10% and Maxim 4% of the market for analog semiconductors, compared to 19% for Texas Instruments, the industry’s market leader. The deal will shrink this difference in a highly fragmented and competitive semiconductor environment.
The combined company will have a combined total of about 46% market share in industrial end-markets that include everything from factory automation to healthcare. It will also hold about 20% of the automotive market and the overall communications market, plus approximately 15% of the consumer device market. Expansion of Analog’s market share in these segments will drive its revenues up in the coming years, assuming the semiconductor market size will continue to grow at a similar rate as in the past.
“The combined group would be well-positioned to deliver the next wave of semiconductor growth” ~ Vincent Roche, CEO of Analog
RISKS AND UNCERTAINTIES
REGULATORY APPROVAL
The size of the deal and the presence of Chinese telecommunications giant Huawei on the list of former customers for both companies may cause the transaction to attract some regulatory scrutiny.
Some of the largest chip deals have been blocked by regulators in recent years, including Broadcom’s pursuit of rival Qualcomm, which was stopped on national security grounds.
However, several smaller deals have been approved, including a €9bn merger between Germany’s Infineon Technologies and US rival Cypress Semiconductor in 2019, as well as Dutch semiconductor group NXP’s acquisition of the WiFi business of Marvell Technology Group for $1.8bn.
OUR VIEW:
Horizontal integration between Analog and Maxim looks very promising. The 22% premium that Analog is expected to pay seems reasonable considering the significant market share gains and costs/revenue synergies the deal is expected to achieve in the long-run. Acquisition will enable Analog to solidify and strengthen its current market position in a highly competitive industry, making it the second largest semiconductor producer in the world. Despite the concerns over regulatory scruitiny and possible halt to the deal, I believe that given the upsides of the transaction (which will ultimately favor the end markets through better pricing and quality improvements), the deal will be given a green light.
