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April 07, 2011, 11:08 AM EDT
By Ian King and Rita Nazareth
April 7 (Bloomberg) -- Shareholders of Intersil Corp., a maker of chips that regulate power in computers, phones and industrial machinery, can thank National Semiconductor Corp. for suddenly ensuring their year will be lucrative.
Intersil, a direct competitor to National Semiconductor, is trading at twice the value of its own sales. That’s about half the industry average and cheaper than National Semiconductor before it announced a $6.5 billion takeover by Texas Instruments Inc. this week, according to data compiled by Bloomberg. While Intersil’s revenue growth outstripped National Semiconductor’s over the past five years, a lower operating margin leaves more room for a buyer to boost profit.
The market for chips that regulate voltage in devices such as mobile phones and industrial robots has grown 169 percent to $9.1 billion since 2001, almost double the pace of the broader semiconductor industry, according to research firm IHS ISuppli. Investors are speculating Analog Devices Inc. may buy Intersil, which has a market value of $1.7 billion, said Tore Svanberg, an analyst with Stifel Nicolaus & Co. in San Francisco.
“Intersil could be an interesting takeover target on the heels of the NSM transaction,” said Dan Veru, chief investment officer at Palisade Capital Management LLC in Fort Lee, New Jersey, which oversees $3.8 billion. “The acquirer could drive margins higher because of their size and scale and customers that they do business with.”
Today’s Trading
Brendan Lahiff, a spokesman for Milpitas, California-based Intersil, declined to comment on speculation. Sue Martenson, a spokeswoman for Norwood, Massachusetts-based Analog Devices, also declined to comment.
Intersil climbed 5.1 percent to $13.99 at 11 a.m. New York time in Nasdaq Stock Market trading.
The shares gained the most in two years April 5 and 15 percent over the past three days after Texas Instruments agreed to acquire Santa Clara, California-based National Semiconductor for $25 a share. The bid represented a 75 percent premium to National Semiconductor’s 20-day trading average, the highest for a chipmaker takeover greater than $500 million since 2000, according to data compiled by Bloomberg.
“This is going to open up the floodgates, psychologically,” said Vernon Essi, an analyst at Needham & Co. in Boston. Intersil is “an interesting target. There’s value there.”
Intersil sells for 2 times revenue, versus the average of 3.7 times for 42 U.S.-traded semiconductor makers with more than $500 million in market value, according to data compiled by Bloomberg. National Semiconductor, which had a price-sales ratio of 2.2 times before Dallas-based Texas Instruments’ takeover announcement, now trades at 3.7 times, the data show.
Less Expensive
National Semiconductor had sales of $1.42 billion in its fiscal year ended May, a 26 percent decline from five years earlier, data compiled by Bloomberg show. Intersil reported revenue of $822 million last year, a 37 percent increase from 2005, the data show. National Semiconductor has been exiting less profitable businesses, sacrificing revenue, for the sake of wider margins.
Texas Instruments, the largest maker of analog chips, is wagering it can reverse National Semiconductor’s revenue slump with the biggest sales force among chipmakers. Chief Executive Officer Rich Templeton, 52, said he will increase revenue at more than twice the industry rate.
Dishwashers to Cars
Analog semiconductors, which go into everything from military hardware to washing machines, perform functions such as power regulation and the conversion of touch and sound into electronic signals. As more everyday items such as dishwashers and cars have added electronic functions, older analog technologies have resurged.
Further deal making may be limited because companies in the $47 billion analog semiconductor industry make thousands of non- interchangeable chips. Texas Instruments alone makes about 30,000 different chips.
“Sometimes acquisitions take place because there is a rush to pick up technology so you don’t get left behind,” said Steve Smigie, an analyst at Raymond James Financial Inc. in St. Petersburg, Florida. Given the thousands of different niche products with a lifespan of up to five years, “it’s not like not acquiring a company is going to leave an analog company out of the loop in some major way,” he said.
The most-coveted area in the analog industry is power regulation chips, semiconductors that take electricity from batteries and distribute it according to the different needs of other components. Revenue for that business, which Intersil and National Semiconductor both serve, surged 36 percent in 2010, according to El Segundo, California-based IHS ISuppli.
Squeeze More Profit
A buyer may be able to squeeze more profit out of Intersil than National Semiconductor by slashing operating expenses, according to Stifel Nicolaus’ Svanberg. Intersil’s 16 percent operating margin, or the amount of income made from each dollar of sales, trailed National Semiconductor’s 24 percent margin in 2010, data compiled by Bloomberg show.
The company retained about 58 cents per dollar of revenue after subtracting the cost of goods sold, a lower gross margin than National Semiconductor’s 66 percent.
“You’ve got in your deal analysis the ability to expand margins and make it a more profitable deal,” Malcolm Polley, who oversees $1 billion as chief investment officer at Stewart Capital in Indiana, Pennsylvania, said of Intersil. “It really comes down to the proof is in the pudding.”
Credit Ratings
Intersil’s management has reduced its dependence on personal computers -- a lower-margin business. Combining Intersil with a rival may help its chips win a spot in more products outside of the PC industry, including initiatives such as chips that power rear-view cameras in cars, said Chris Caso, an analyst with Susquehanna International Group in New York.
Analog Devices, a potential bidder for Intersil, has about $3 billion in cash and short-term investments and $537.6 million in total debt. The maker of chips used in cars and consumer electronics is rated A2, the third-highest level of investment grade, according to Bloomberg’s Company Credit Ratings.
Adding $1.7 billion to its long-term debt would lower its ranking three levels to A1, according to Bloomberg’s ratings, which analyze borrowers based on indebtedness, profitability and other financial ratios.
Micrel Inc., a maker of chips for communications equipment, and Semtech Corp., which producers chips for digital cameras, rallied 7.3 percent and 7.5 percent, respectively, the day after Texas Instruments’ acquisition. Both may also be potential takeover targets, said Stifel Nicolaus’ Svanberg.
‘Ripe for Consolidation’
Julieanne DiBene, a spokeswoman for San Jose, California- based Micrel, declined to comment. Pauline Cadena, a spokeswoman for Camarillo, California-based Semtech, didn’t return a phone call seeking comment.
“You’ll see more deals. You’ll see a small number of companies involved,” said Brian Barish, Denver-based president of Cambiar Investors LLC, which oversees about $8 billion. “The industrial and analog semiconductor spaces are ripe for consolidation.”
Barish’s $1.6 billion Cambiar Opportunity Fund has outperformed 98 percent of rival funds in the past year.
Overall, there have been 6,439 deals announced globally this year, totaling $651.4 billion, a 27 percent increase from the $512.6 billion in the same period in 2010, according to data compiled by Bloomberg.
--With assistance from Michael Tsang and Tara Lachapelle in New York. Editors: Sarah Rabil, Daniel Hauck.
To contact the reporters on this story: Ian King in San Francisco at ianking@bloomberg.net; Rita Nazareth in New York at rnazareth@bloomberg.net.
To contact the editors responsible for this story: Daniel Hauck at dhauck1@bloomberg.net; Katherine Snyder at ksnyder@bloomberg.net; Tom Giles at tgiles5@bloomberg.net.
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April 7 (Bloomberg) -- Shareholders of Intersil Corp., a maker of chips that regulate power in computers, phones and industrial machinery, can thank National Semiconductor Corp. for suddenly ensuring their year will be lucrative.
Intersil, a direct competitor to National Semiconductor, is trading at twice the value of its own sales. That’s about half the industry average and cheaper than National Semiconductor before it announced a $6.5 billion takeover by Texas Instruments Inc. this week, according to data compiled by Bloomberg. While Intersil’s revenue growth outstripped National Semiconductor’s over the past five years, a lower operating margin leaves more room for a buyer to boost profit.
The market for chips that regulate voltage in devices such as mobile phones and industrial robots has grown 169 percent to $9.1 billion since 2001, almost double the pace of the broader semiconductor industry, according to research firm IHS ISuppli. Investors are speculating Analog Devices Inc. may buy Intersil, which has a market value of $1.7 billion, said Tore Svanberg, an analyst with Stifel Nicolaus & Co. in San Francisco.
“Intersil could be an interesting takeover target on the heels of the NSM transaction,” said Dan Veru, chief investment officer at Palisade Capital Management LLC in Fort Lee, New Jersey, which oversees $3.8 billion. “The acquirer could drive margins higher because of their size and scale and customers that they do business with.”
Today’s Trading
Brendan Lahiff, a spokesman for Milpitas, California-based Intersil, declined to comment on speculation. Sue Martenson, a spokeswoman for Norwood, Massachusetts-based Analog Devices, also declined to comment.
Intersil climbed 5.1 percent to $13.99 at 11 a.m. New York time in Nasdaq Stock Market trading.
The shares gained the most in two years April 5 and 15 percent over the past three days after Texas Instruments agreed to acquire Santa Clara, California-based National Semiconductor for $25 a share. The bid represented a 75 percent premium to National Semiconductor’s 20-day trading average, the highest for a chipmaker takeover greater than $500 million since 2000, according to data compiled by Bloomberg.
“This is going to open up the floodgates, psychologically,” said Vernon Essi, an analyst at Needham & Co. in Boston. Intersil is “an interesting target. There’s value there.”
Intersil sells for 2 times revenue, versus the average of 3.7 times for 42 U.S.-traded semiconductor makers with more than $500 million in market value, according to data compiled by Bloomberg. National Semiconductor, which had a price-sales ratio of 2.2 times before Dallas-based Texas Instruments’ takeover announcement, now trades at 3.7 times, the data show.
Less Expensive
National Semiconductor had sales of $1.42 billion in its fiscal year ended May, a 26 percent decline from five years earlier, data compiled by Bloomberg show. Intersil reported revenue of $822 million last year, a 37 percent increase from 2005, the data show. National Semiconductor has been exiting less profitable businesses, sacrificing revenue, for the sake of wider margins.
Texas Instruments, the largest maker of analog chips, is wagering it can reverse National Semiconductor’s revenue slump with the biggest sales force among chipmakers. Chief Executive Officer Rich Templeton, 52, said he will increase revenue at more than twice the industry rate.
Dishwashers to Cars
Analog semiconductors, which go into everything from military hardware to washing machines, perform functions such as power regulation and the conversion of touch and sound into electronic signals. As more everyday items such as dishwashers and cars have added electronic functions, older analog technologies have resurged.
Further deal making may be limited because companies in the $47 billion analog semiconductor industry make thousands of non- interchangeable chips. Texas Instruments alone makes about 30,000 different chips.
“Sometimes acquisitions take place because there is a rush to pick up technology so you don’t get left behind,” said Steve Smigie, an analyst at Raymond James Financial Inc. in St. Petersburg, Florida. Given the thousands of different niche products with a lifespan of up to five years, “it’s not like not acquiring a company is going to leave an analog company out of the loop in some major way,” he said.
The most-coveted area in the analog industry is power regulation chips, semiconductors that take electricity from batteries and distribute it according to the different needs of other components. Revenue for that business, which Intersil and National Semiconductor both serve, surged 36 percent in 2010, according to El Segundo, California-based IHS ISuppli.
Squeeze More Profit
A buyer may be able to squeeze more profit out of Intersil than National Semiconductor by slashing operating expenses, according to Stifel Nicolaus’ Svanberg. Intersil’s 16 percent operating margin, or the amount of income made from each dollar of sales, trailed National Semiconductor’s 24 percent margin in 2010, data compiled by Bloomberg show.
The company retained about 58 cents per dollar of revenue after subtracting the cost of goods sold, a lower gross margin than National Semiconductor’s 66 percent.
“You’ve got in your deal analysis the ability to expand margins and make it a more profitable deal,” Malcolm Polley, who oversees $1 billion as chief investment officer at Stewart Capital in Indiana, Pennsylvania, said of Intersil. “It really comes down to the proof is in the pudding.”
Credit Ratings
Intersil’s management has reduced its dependence on personal computers -- a lower-margin business. Combining Intersil with a rival may help its chips win a spot in more products outside of the PC industry, including initiatives such as chips that power rear-view cameras in cars, said Chris Caso, an analyst with Susquehanna International Group in New York.
Analog Devices, a potential bidder for Intersil, has about $3 billion in cash and short-term investments and $537.6 million in total debt. The maker of chips used in cars and consumer electronics is rated A2, the third-highest level of investment grade, according to Bloomberg’s Company Credit Ratings.
Adding $1.7 billion to its long-term debt would lower its ranking three levels to A1, according to Bloomberg’s ratings, which analyze borrowers based on indebtedness, profitability and other financial ratios.
Micrel Inc., a maker of chips for communications equipment, and Semtech Corp., which producers chips for digital cameras, rallied 7.3 percent and 7.5 percent, respectively, the day after Texas Instruments’ acquisition. Both may also be potential takeover targets, said Stifel Nicolaus’ Svanberg.
‘Ripe for Consolidation’
Julieanne DiBene, a spokeswoman for San Jose, California- based Micrel, declined to comment. Pauline Cadena, a spokeswoman for Camarillo, California-based Semtech, didn’t return a phone call seeking comment.
“You’ll see more deals. You’ll see a small number of companies involved,” said Brian Barish, Denver-based president of Cambiar Investors LLC, which oversees about $8 billion. “The industrial and analog semiconductor spaces are ripe for consolidation.”
Barish’s $1.6 billion Cambiar Opportunity Fund has outperformed 98 percent of rival funds in the past year.
Overall, there have been 6,439 deals announced globally this year, totaling $651.4 billion, a 27 percent increase from the $512.6 billion in the same period in 2010, according to data compiled by Bloomberg.
--With assistance from Michael Tsang and Tara Lachapelle in New York. Editors: Sarah Rabil, Daniel Hauck.
To contact the reporters on this story: Ian King in San Francisco at ianking@bloomberg.net; Rita Nazareth in New York at rnazareth@bloomberg.net.
To contact the editors responsible for this story: Daniel Hauck at dhauck1@bloomberg.net; Katherine Snyder at ksnyder@bloomberg.net; Tom Giles at tgiles5@bloomberg.net.
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