Texas Instruments (TXN) Could be a Dark Horse in NXP Semi (NXPI) Bidding - Nomura

October 4, 2016 9:59 AM EDT
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Price: $101.71 -2.66%

Rating Summary:
    25 Buy, 2 Hold, 0 Sell

Rating Trend: Down Down

Today's Overall Ratings:
    Up: 14 | Down: 11 | New: 8
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Nomura Securities analyst Romit Shah said it is almost inevitable that NXP Semiconductors NV (NASDAQ: NXPI) get acquired, and as a result he reiterated his Buy rating and raised his price target to $120.00 (from $95.00). While most expect Qualcomm (NASDAQ: QCOM) to win the process, and they don't disagree, they see Texas Instruments (NASDAQ: TXN) as a dark horse that hasn't been seriously thought of and could scoop up NXP.

Shah highlights that Texas Instruments has M&A in their DNA. The company has made 33 acquisitions over the last twenty years, including Unitrode ($1.2b, ‘99), Burr-Brown ($7.6b, ‘00) and National Semiconductor ($6.5b, ‘11), but none in the last five years.

The analyst also notes that NXPI CEO Rick Clemmer and Chairman Peter Bonfield are former TI employees. "We believe that Mr. Clemmer maintains close ties with the TI management team," he said. "Mr. Bonfield has spoken publicly about his affection for Texas Instruments, especially the influence of founder Pat Hagerty on his early career."

Looking at the numbers, NXPI would be almost 30% accretive, boosting EPS from $3.84 to roughly $5 in 2019, per our estimation. "TXN mgmt. has expressed confidence that they could drive R&D of most business in-line with the corporate average (12.5%)," Shah comments. "If we also assume SG&A declines by 50%, we estimate eps would increase from $3.56 to $4.38 in CY18 and from $3.84 to $4.94 in CY19. Based on this analysis, we believe TXN could trade at 16x or up to $80 per share."

Also, NXPI would boost TXN from fourth to the second largest nonmemory semiconductor company by revenues. "As the semiconductor industry continues to consolidate, increasing scale (both revenue and operational) becomes more important. We believe this is especially true for companies that operate their own fabs," the analyst commented.

In addition to the reasons given above, Shah highlighted the following reasons a TXN/NXPI deal would make sense:

  • NXPI + TXN is a better cultural and strategic fit than Qualcomm, in our view
  • Major TAM expansion in automotive
  • The timing is right - "TXN has spent the last five years successfully driving a narrative around a steady growth and improving cash flow and capital returns."
  • TXN can afford it - "Using a $40b valuation ($120/share), we believe TXN could finance the transaction with $10.5b in equity, $5b cash on hand, and $26.5b of new debt."
  • Tax rates may come down over time
  • Minimal regulatory scrutiny

For an analyst ratings summary and ratings history on NXP Semiconductors NV click here. For more ratings news on NXP Semiconductors NV click here.

Shares of NXP Semiconductors NV closed at $102.76 yesterday.

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