Updated from 12:05 p.m. EST
ongoing effort to slim down to its essentials moved forward Monday, when the company announced the sales of its sensors and controls business for $3 billion.
The sale of one of its three main divisions, accounting for roughly 10% of 2004 revenue, to private equity firm Bain Capital was not unexpected, having been the subject of rumors for weeks.
But while the deal ended speculation about one TI division, it raised more questions about another: the company's well-known calculator business. With TI now even more squarely focused on the cell-phone market, where it is the world leader, the company's Educational and Productivity Solutions group, which accounted for 5% of overall revenue in 2004, sticks out like a sore thumb.
"It's the logical next step," says Stifel, Nicolaus & Co. analyst Cody Acree. "Whether or not we see that happen in the short term is still up in the air,
but they've got to find a buyer for it," says Acree, whose firm does not have any banking relationship or own shares in TI. And with TI's brand so closely associated with the calculators, the business might not transfer to another company as easily as other divisions.
A TI representative said the company has a longstanding policy of not commenting on speculation about mergers, acquisitions or divestitures of its businesses.
TI's shedding of its sensors and controls division, which makes electronic products found in everything from automobile fuel injection systems to industrial air conditioning units, is the latest step in its strategy of shedding noncore assets. In 1998, TI sold its memory business to
According to TI, the sale will allow the company to focus more on its core products, while allowing the sensors business the flexibility to grow faster than it would as a second-class citizen at TI, where most of the resources were directed toward the semiconductor group. The deal will not include TI's radio frequency identification, or RFID, business, which will be folded into the semiconductor division.
Based in Attelboro, Mass., TI's sensors business employs about 5,400 workers. The $3 billion price tag represents a nice premium on the business, which generates about $1 billion in annual sales.
That's because the sensors business has several things to recommend it, say analysts, including operating margins of roughly 25%, and long product cycles that allow TI to ink supply contracts that can last for several years. And with automobiles
incorporating increasing amounts of chips every year for safety and entertainment features, the business is bound to grow.
As attractive as the business is, however, TI CFO Kevin March said it's still not in the same league as the company's semiconductor business, which focuses on high-growth markets like cell phones and handheld electronic gadgets.
For the past three years, says March, sales in the sensors and controls business have increased about 7%, compared with 17% a year in the semiconductor business. And the operating margins in semiconductors last quarter exceeded those of the sensors group.
"When you've got faster top-line growth combined with higher operating margins, what that says to us is that sensors and controls will be averaging down both our revenue and earnings growth in the future," says March.
In the past, the sensors business, which doesn't have the same seasonality as TI's other businesses, has acted as a stabilizing influence on the company's finances. But as the business has become a smaller portion of TI's overall mix, its ability to act as a buffer against seasonality has been diminished, March says.
The company has not said how it intends to use the proceeds of the deal. With more than $5 billion in cash and short term investments on its balance sheets, TI certainly doesn't need the money.
"This was not done for purposes of trying to acquire more cash. It was done for strategic reasons," March emphasized.
Shares of TI were down 1.3%, at $34 in Monday trading.