NEW YORK (
) - Monday's surprise announcement that
would buy out
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
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 lot easier 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
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
. 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.
is already rolling out Android-powered handsets with NFC capability.
announced NFC support for phones coming this year earlier in the week. Even
made a splashy announcement this week about its new Symbian-powered NFC phones coming this year.
The big kahuna will be
, which has kept mum on the subject. We will see if NFC support comes in iPhone 5 or 6. However, it won't let its competitors get very far without an elegant response.
NXPI is almost an $8 billion market capitalization company, about twice the size of National Semi. The revenues were $4.4 billion in the last year and EBITDA was a shade under $1 billion.
On the company's last earnings call, it predicted that 70 million NFC-enabled phones would ship in 2011 and 150 million next year. NXPI is the chip that will power a majority of those phones.
The stock has already drawn attention. It's up over $30 since its IPO last August at $12. Recently, some heavy-hitter private equity firms -- like KKR and Silver Lake -- cashed out through secondaries for big wins. The stock is still at all-time highs though, showing that investor demand is more than keeping up with this new supply.
The company has two categories of products: high-performance mixed-signal products and standard products. The former represented 77% of their revenues in 2010.
It is in the high performance area that most investors (and potential buyers are paying attention). Within this segment, there are many applications: automotive, identification, wireless infrastructure, lighting, industrial, mobile, consumer and computing.
NFC falls within the identification sub-segment, which had revenues of $589 million in 2010, a 55% increase over 2009 and the highest growth rate of any of the sub-segments.
If NFC-enabled phones do reach 70 million shipments this year, and NXPI captures 70% of that market (which is probably conservative) and it captures $6 per handset in revenue (which NXPI has never confirmed), it could capture about $300 million in incremental revenue for this segment this year. This would be more than a 50% increase from last year, assuming the rest of the sub-segment doesn't grow, which is of course highly unlikely. And then NFC mobile handsets more than double again in 2012.
For the bigger chip companies, like
, and even
, NFC is the hot new trend in semis.
They will have to look at NXPI as a potential acquisition in order to be able to position themselves as the leader in this segment and to differentiate from their competitors. Because there is likely to be a group mentality in this thinking, the opportunity exists for a bidding war erupting over NXPI.
At the time of publication, Jackson was long NXP Semiconductor, Apple.
Eric Jackson is founder and president of Ironfire Capital and the general partner and investment manager of Ironfire Capital US Fund LP and Ironfire Capital International Fund, Ltd. You can follow Jackson on Twitter at www.twitter.com/ericjackson or @ericjackson