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Deal of the year: Analog’s power move to swallow rival chipmaker

Lex Hall  |  14 Jul 2020Text size  Decrease  Increase  |  
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The move by semiconductor maker Analog Devices (NAS: ADI) to buy rival Maxim Integrated (NAS: MXIM) is the biggest US deal of the year, but perhaps not one that will please Maxim shareholders, says Morningstar analyst Brian Colello.

Colello has modestly raised his fair values for the No 2 and No 3 analog chipmakers, saying it is a sound move for Analog but of limited value to Maxim shareholders.

“Maxim has long been an M&A target, but we’re surprised by the deal, more so because of the timing during the COVID-19 pandemic,” Colello says. “The deal makes strategic sense for Analog, and we have little concern about the price that it is paying for Maxim.

“For Maxim, we don’t think this is a great deal for shareholders as the premium is on the low side, while we think Analog is using overvalued shares (by our estimation) to fund the deal.”

Analog Devices announced on Monday it would buy rival Maxim Integrated Products for about US$21 billion in an all-stock deal, aimed at boosting its market share in automotive and 5G chipmaking.

The deal, which is also ADI’s biggest, will create a chipmaking force with a combined enterprise value of about US$68 billion that will compete with larger rivals including Texas Instruments (NAS: TXN).

The companies say the deal adds Maxim’s strength in automotive and data centre markets to ADI’s broad industrial, communications and digital healthcare segments, Reuters reports.

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Colello concedes he was surprised by the timing of the deal, given the pandemic, but says it was doable because of the strength of Analog’s share price.

Maxim Integrated (MXIM), Analog Devices (ADI), Texas Instruments (TXN) - 1YR

Maxim Integrated, Analog Devices, Texas Instruments - 1YR

Source: Morningstar Premium

Based in Norwood, Massachusetts, Analog Devices provides sensors, data converters, amplifiers and other signal processing products to a range of industries from transportation and healthcare to instrumentation and portable consumer devices.

Based in San Jose, California, Maxim designs and makes analog chips that are used in cars, manufacturing, energy, communications, healthcare and connected devices.

Under the deal, Maxim shareholders will acquire 0.63 shares of Analog, which values Maxim at US$78.43 per share based on Analog’s closing price on 10 July of US$124.50.

Colello has modestly raised his fair value estimate for Analog to US$106 from US$103, mostly due to the improved near-term guidance.

For Maxim, Colello now values the company based on probability weightings and has raised his fair value estimate to US$65 from US$55.

Analog, a wide-moat stock with an exemplary stewardship rating, fell 5.82 per cent in overnight trade and is at a 21 per cent premium to Colello’s fair value estimate.

Maxim, a wide-moat stock with a standard stewardship rating, rose 8 per cent in overnight trade and is fairly valued, according to Colello’s valuation.

Texas Instruments, meanwhile, a wide moat stock with an exemplary stewardship rating, fell 1.3 per cent and is trading at a 14 per cent premium to Colello’s fair value estimate of US$115.

“We think the acquisition of Maxim is neutral to our valuation, as cost synergies from the merger will offset the premium that Analog is paying for Maxim,” Colello says.

“We still view Analog’s shares as overvalued, although we’re encouraged that the company is leveraging its rich share price to make a strategically sound merger.”

Colello assigns a 75 per cent probability to the merger achieving approval from regulators in the US, China and Europe, with any risks mostly tied to geopolitical concerns rather than monopolistic overlap.

“Based on our US$106 valuation for Analog, we value the soon-to-be-acquired shares for Maxim shareholders at US$67.

“For the remaining 25 per cent probability, we use a US$58 fair value estimate for Maxim, equal to our standalone valuation of Maxim plus a termination fee if the deal falls apart.”

The merger is expected to close in the northern summer of 2021.

“Thereafter, Analog believes it can extract US$275 million of cost synergies within two years of the deal closing, which appears to be a reasonable estimate to us based on Maxim’s manufacturing and SG&A cost structure.”

Colello says that by acquiring the company in an all-stock deal, Analog will also be able to avoid hefty financial leverage and expects to maintain a healthy debt-to-EBITDA ratio of 1.2 times on a pro forma basis.

Additional reporting: Reuters

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is senior editor for Morningstar Australia

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