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Nat Semi' Premium Among Largest This Century

It’s not the figure on the price tag of Texas Instrument’s bid for National Semiconductor that warrants scrutiny. Valued at approximately $6.5 billion, the TI-Nat Semi merger barely ranks in the top 25 global deals announced this year.

Texas Instruments
Source: ti.com
Texas Instruments

It’s the premium to National Semi’s unaffected share price that is noteworthy. The $25-a-share price tag boasts a 78 percent premium to its closing price prior to the announcement.

The stock has since surged over 70 percent.

According to data complied by Dealogic, TI’s Nat Semi bid ranks ninth out of the top 10 largest premiums for deals worth over a billion dollars announced in the past 10 years.

Abbott Labs’2009 bid for Advanced Medical Optics tops that list, with a 148 percent premium. In the tech sector, TI’s premium was only outmatched by Microsoft’s 2007 bid for aQuantive Inc, with was an 85 percent premium.

The lofty premium doesn’t disconcert TI’s CEO, Richard Templeton. Templeton tells CNBC Texas Instruments was focused on valuation rather than premium. “The big test we wanted to make sure we could pass was a return on invested capital, which we think we can earn within the third and fourth year given the growth rates as well as it will be accretive in the first year excluding transaction cost.”

Betting on analog as a driver of growth, the Nat Semi acquisition will push the percentage of TI’s revenue from the analog space to 50 percent. Specifically, Templeton noted that, “the national product line has a tremendous power management portfolio which we think is one of the fastest growth areas in analog.”

Analog chips are used in electronics ranging from cell phones to heavy industrial equipment. The chips carry out a number of functions including power management and converting audio and video into digital signals. It is a market that Templeton says has a tremendous financial model, ripe with great margins and cash flow because analog chips tend to be run on older manufacturing equipment.

According to TI, the analog market was $42 billion in 2010. TI occupied 14 percent of the market with $6 billion in analog sales, and National Semi raked in $1.6 billion in sales, or 3 percent of the market.

Templeton credits the proliferation of smart phones, tablets and a worldwide increase in appetite for electronics for the company’s need to be more aggressive in ramping up communications infrastructure. “Every time somebody’s using a tablet or smart phone you have a lot of data traffic.”

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While not all analysts agree that this deal makes sense, Credit Suisse wrote in a research report that the premium may be justifiable if TI is able to drive Nat Semi growth to TI rates.

Templeton admits that while TI has outgrown the market with its analog, Nat Semi has underperformed. However the company is confident that Nat Semi’s growth can eventually match its own. Templeton added, “...the quality of the portfolio is tremendous and we just want to get it turned loose on our sales force.”

Questions? Comments? Write to faberreport@cnbc.com.

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