Wednesday, April 06, 2011

NXP Semiconductor Ripe for Acquisition?

By Eric Jackson, Senior Contributor04/06/11 - 06:00 AM EDT

NEW YORK (TheStreet) - Monday's surprise announcement that Texas Instruments(TXN_)would buy out National Semiconductor(NSM_) at an 80% premium caught the market off-guard.

National Semi is an old-line analog chip company that's gone through countless restarts and refreshes. It's even caught the eye of activist investors like Relational Investors over the years, looking to push it to better unlock value in its shares.

The move by TI and the price paid suggest one thing: we're not at the end of the road of M&A by a long shot. The deal shows that TI is using cheap debt from the Federal Reserve to grow its business. Why wouldn't you borrow cheaply, pay an 80% premium even, when you can add $1.5 billion in annual revenues and $600 million in annual EBITDA.

What's more, National Semi has been growing its quarterly earnings by 11% year on year. So, you're simply performing a price arbitrage like the bankers do every day. Borrow at 7% (for example) to buy something growing at nearly 12%. I'll do that deal.

That increased EBITDA is only going to be about 10% of TI's EBITDA next year. But buying that is sure a loteasier to organically growing that.

As long as we have this environment of lower-priced debt, these kinds of deal -- especially in the mid-range market --- will be prevalent. And we'll also see 3PAR-like battles (as happened between Dell(DELL_) andHewlett-Packard(HPQ_) last year).

That's bullish for stocks in general. Who doesn't like a good "Merger Monday"?

The whole semiconductor space popped Tuesday on the news. I expect we will see it be particularly hot for deals, as you have a lot of bigger chip companies looking to grow and plenty of choices in the mid-market that are chalking up strong growth rates.

One stock I'm particularly bullish on is NXP Semiconductor(NXPI_). It is the purest of "pure plays" when it comes to near-field communication (NFC) which is subject of a lot of hype and speculation about how we will make mobile payments in the future.

Google(GOOG_) is already rolling out Android-powered handsets with NFC capability.Sprint(S_) announced NFC support for phones coming this year earlier in the week. Even Nokia(NOK_) made a splashy announcement this week about its new Symbian-powered NFC phones coming this year.


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