Texas Instruments Pays Too Much For National Semi

Texas Instruments (NYSE: TXN) will buy National Semiconductor (NYSE: NSM) for $25 a share in cash. The total value of the transaction is $6.5 billion. That price is 78% above where National Semi traded before the offer, which is a premium almost impossible to justify even in a new age of synergy.

National Semi last traded at $25 in late 2007. Its share price is down more than 50% in the last five years. Texas Instrument’s shares are flat over the same period which means it has done no better than the S&P 500.

The reason National Semi’s stock is down so much is the reason that TI should not have bought the company. National Semi revenue in its 2005/2006 fiscal year was $2.2 billion. Last year that number was $1.4 billion. Over the same time, net income has fallen from $449 million to $209 million. There is barely a bright spot in any of the years in between.

The argument that TI management has made in favor of the transaction is that the two companies are in nearly the same business. That is an often-used excuse. Synergy allows merged tech companies to cut R&D costs, lower administrative expenses, and use one sales force to handle an array of products. The same theory was used to justify the merger of Alcatel and Lucent. It took five years for the combined company to emerge from the disaster. The same can also be said of AMD’s (NYSE: AMD) buyout of ATI which nearly destroyed that company and the Hewlett-Packard (NYSE: HPQ) acquisition of Compaq. The list beyond these examples is fairly long.

It is not mentioned often enough that firms like Apple (NASDAQ: AAPL) and IBM (NYSE: IBM) do very few acquisitions. They stick to their knitting as some management consultants say is best practice. Advocates of tech deals point to Cisco (NASDAQ: CSCO) and Oracle (NASDAQ: ORCL) as remarkably successful in the buyout game. For each of these there are ten companies which have not done as well. A small sample of remarkably well-run firms is hardly a justification for the risk that a mediocre corporation like TI has taken on.

History is against the TI buyout of National Semi and so is the competence of TI’s management, at least as far as the stock market says

Douglas A. McIntyre