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Chip Stocks Gain on ADI-Maxim Deal, Positive Sales Announcements

In addition to announcing their merger, ADI and Maxim also each hiked their quarterly sales guidance. But many investors apparently have concerns about the price.
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Though Analog Devices  (ADI) - Get Analog Devices, Inc. Report is down more than 3% following news of its roughly $20 billion, all-stock deal to acquire rival Maxim Integrated  (MXIM) - Get Maxim Integrated Products, Inc. Report, many other chip stocks are outperforming, and perhaps not just because of the deal announcement.

A slew of chip suppliers have risen over 2%, as the Nasdaq has registered a 1.4% gain. The list includes ADI/Maxim peers such as NXP Semiconductors  (NXPI) - Get NXP Semiconductors NV Report, ON Semiconductor  (ON) - Get ON Semiconductor Corporation Report, Diodes  (DIOD) - Get Diodes Incorporated Report and Silicon Labs  (SLAB) - Get Silicon Laboratories Inc. Report, as well as Japanese chipmaker Renesas, which rose 4.6% overnight in Tokyo.

Other chip suppliers posting healthy gains include silicon carbide chip developer Cree  (CREE) - Get Cree, Inc. Report, broadband/networking chip developer MaxLinear  (MXL) - Get MaxLinear inc Report and programmable chip developer Lattice Semiconductor  (LSCC) - Get Lattice Semiconductor Corporation Report.

In addition, chip contract manufacturers (foundries) Taiwan Semiconductor  (TSM) - Get Taiwan Semiconductor Manufacturing Co. Ltd. Report, United Microelectronics  (UMC) - Get United Microelectronics Corp. Report and Tower Semiconductor  (TSEM) - Get Tower Semiconductor Ltd Report are also outperforming. TSMC, which is believed to have a 50%-plus foundry market share, released a June sales report on Friday morning that (when taken with prior sales reports) implies its Q2 revenue will be above prior guidance of $10.1 billion to $10.4 billion.

Along with the ADI/Maxim news, chip stocks could be getting a boost from ADI and Maxim’s hiking of their quarterly sales guidance, which follows positive sales announcements from several other chip developers in recent weeks.

ADI now expects quarterly revenue of $1.45 billion, plus or minus $70 million, up from prior guidance of $1.32 billion, plus or minus $70 million. Maxim expects to report June quarter revenue of about $545 million, above prior guidance of $480 million to $540 million.

Also, Nordic Semiconductor, a developer of wireless connectivity chips, posted a strong Q2 report overnight, disclosing its revenue rose 25.5% annually and that its order backlog grew 80.3%. Nordic’s shares rose 10.5% in Monday trading in Oslo.

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How ADI sees the Maxim deal paying off. Source: ADI.

How ADI sees the Maxim deal paying off. Source: ADI.

The ADI/Maxim deal is fueling hopes of additional consolidation for a chip industry that has seen numerous mergers and acquisitions over the last seven years, but which has also seen relatively subdued consolidation activity over the last twelve months. This could particularly hold for companies squaring off against ADI and Maxim in the analog/mixed-signal and microcontroller (MCU) markets, which in spite of having seen a decent amount of consolidation, are still relatively fragmented.

Prior deals in this space include ADI’s $14.8 billion deal to buy Linear Technology (it closed in March 2017), as well as Renesas’ $6.7 billion acquisition of IDT, Infineon Technologies’ $10 billion deal to buy Cypress Semiconductor and Microchip Technology’s  (MCHP) - Get Microchip Technology Incorporated Report acquisitions of Atmel and Microsemi (they cost $3.6 billion and $8.4 billion, respectively).

As was the case for many of these prior deals, ADI argues the Maxim deal -- expected to close in the summer of 2021, provided regulators sign off -- will yield significant cost synergies and give the company more comprehensive product lines to sell to customers in major end-markets such as automotive, industrial, telecom infrastructure and consumer electronics. The company asserts the deal will generate $275 million worth of cost synergies by the end of its second year after closing, and that the combined company will have more than 50,000 products to serve its 125,000-plus combined customers.

Also, though ADI and Maxim might not want to bring this up as much as right now, there may be hopes that the deal will give the combined company additional pricing power. Research firm IC Insights estimates ADI and Maxim had, respectively, 10% and 4% market shares of the analog IC market in 2019, good for second and seventh place. Texas Instruments  (TXN) - Get Texas Instruments Incorporated Report, with an estimated 19% share, was the market leader.

Nonetheless, many investors have concerns about the price that ADI is paying for Maxim. With the caveat that ADI expects major deal synergies, the acquisition price (based on where ADI currently trades) is equal to more than 30 times Maxim’s fiscal 2020 (ended in June 2020) EPS consensus of $2.21.

There might also be concerns about the fact that Maxim has lost some analog chip share in recent years.

IC Insights estimates Maxim’s analog IC sales fell 13% in 2019 to $1.85 billion, worse than the roughly 8% decline seen by the industry overall thanks to a cyclical downturn. ADI, by comparison, is estimated to have seen its analog IC sales drop only 6% to $5.17 billion.