By Luca Delpippo and Nikunj Agarwal, St Andrews and MIT
Overview of the deal
Acquirer: Analog Devices Incorporated
Target: Maxim Integrated Products Incorporated
Implied Equity Value: $68bn
Total Transaction Size: $21bn
Closed date: Summer 2021
Target advisor: J.P. Morgan served as exclusive financial advisor to Maxim, and Weil, Gotshal & Manges LLP served as legal counsel.
Analog Devices is set to merge with rival semiconductor company Maxim Integrated Products in an $21bn all-stock deal that would create a $68bn company. The deal is expected to close by the end of summer 2021, pending regulatory approval. Analog devices, which is based in Massachusetts, with operations in SIlicon Valley, is offering to pay $78.3 per share for the San Jose based, Maxim integrated, at a rough 13% premium to Maxim’s Wednesday open and 22% premium at the time the deal was announced. Both Analog and Maxim make analogue chips which convert real world signals into electronic ones. Maxim, which was founded in 1983, specialises in chips for cars, healthcare and mobile phones and had $2.3bn in revenue last year, with Analog generating $6bn, half of that coming from industrial clients. The announcement sent an 11% surge in Maxim share price with a 4% drop in Analog’s share price, with investors cautious of the premium being paid to Maxim. The deal would help the companies compete with bigger rivals such as Texas Instruments and reportedly save about $275 million in cumulative costs in years 1 and 2 of the merger, according to Analog devices.
"Both companies have strong engineering and technology know-how and innovative cultures. Working together, we will create a stronger leader, delivering outstanding benefits to our customers, employees and shareholders." — Maxim CEO Tunc Doluca
Company Details: Analog Devices
Analog Devices designs, manufactures and offers a range of products that utilise high-performance analog, mixed-signal and digital signal processing technology, including integrated circuits, software, subsystems and algorithms. They generate the largest portion of their revenue from industrials-sector clients.
Founded in 1965, headquartered in Norwood, Massachusetts
CEO: Vincent Roche (28 Mar 2013-)
Number of employees: 16,400 (2019)
Market Cap: $42.016bn (as of 22/07/2020)
LTM Revenue: $5.78bn
LTM EBITDA: $2.55bn
LTM EV/Revenue: x8.77
LTM EV/EBITDA: x19.88
Company Details: Maxim Integrated Products
Founded in 1983 and headquartered in San Jose, California, Maxim Integrated is an American, publicly-traded company designing, manufacturing, and selling analog and mixed-signal integrated circuits. It develops (ICs) for the automotive, industrial, and computing markets.
CEO: Tunc Doluca
Number of employees: 7173 (June 2019)
Market Cap: $18.40 billion (as of 21/07/2020)
EV: $15.62 Billion (as of 09/06/2020)*
LTM Revenue: $2.2 billion
LTM EBITDA: $786.1 million
LTM EV/Revenue: 7.1x
LTM EV/EBITDA: 19.8x
(EV lower than Market Capitalisation, as figures recorded one month apart from each other. With maxim witnessing approximately 15% rise in equity share value over the last month, market capitalisation rose significantly. Another contributing factor would be Maxim’s negative net debt, caused by excess cash reserves)
In the recent future, the combined strengths of ADI’s analog semiconductor leadership position with expected revenue of $8.2 billion and a $2.7 billion free cash flow (pro forma basis) will further be compounded by Maxim’s strengths in the automotive and data center markets. The combined firm, with ADI’s strength across industrial, communications and digital healthcare markets leads to high complementarities aligned with key secular growth trends.
Moreover, strengthening financial performance on the earnings Accretion & Cost Savings side, this transaction is expected to be accretive to adjusted EPS in 18 months subsequent to closing with $275 million of cost synergies by the end of year one or two, which would be driven primarily by lower operating expenses and cost of goods sold. The high cost synergies signify a positive NPV transaction, which is the incremental gain in the combined firm Value (estimated to be $68 billion), compared to the sum of the initial values of the two firms. Since additional cost synergies are expected to be realised from manufacturing, a constant price allows the company to invest its excess free cash flow into more lucrative investment opportunities, further raising future earnings. ADI is expected to yield a stronger balance sheet, with a pro forma net Debt-to-Asset ratio of approximately 1.2x. This further leads to a rise in the company’s equity beta measure, leading to, though a more risky, but higher return on enterprise value.
Being merged with a semi-conducting industry leader, the combination of best-in-class technologies is expected to enhance, from DC to 100 gigahertz and sensor to cloud with more than 50,000 products, the depth of domain expertise & engineering of ADI. This will enable the combined company to offer more complete solutions, allowing it to provide service to upwards of 100000 customers and raising ADI’s market share of a $50 billion+ total addressable market by more than 60%.
The analog chip industry accounts for 13%, or about $54 billion, of the global $412 billion chip market last year, potentially shifting competitive pressures of the industry as a whole. Since the offer had been made at a premium, a strong future performance of Maxim had likely been expected, given optimistic forecasts of IC demand, especially by Computing and industrial firms. This means that while in the short term, the equity value would be less than would have been in the case of a fair-value purchase, company stakeholders will likely observe strong revenues and further automation- notably in the field of quantum computing- in the coming decade.
The merger also has the promise of reducing competitive pressures on the combined firm in the long run, reducing the net change in costs associated with undercutting rivals by the incumbent firm; this poses a challenge for smaller more marginalised startups in the industry who might find it unprofitable to continue given the cost advantage imposed by the significant economies of scale & reduction in ex-post inefficiency of the merged firm.
Risks and Uncertainties
Whilst it is true that this deal would create a $68bn chip-making powerhouse, it is not without risks or uncertainties. For example, the chip company Broadcom’s attempt at acquiring Qualcomm was halted by U.S. authorities on national security grounds. With semiconductors being the ‘brain’ behind electronics, it is no surprise that in the current geopolitical climate, there remains a significant risk of regulatory blocking of the deal. Whilst both boards have agreed the merger requires regulatory approval in the EU and, crucially, the U.S. and China. Furthermore, despite Analog’s hope that $275mn will be shaved off costs by year two, there is limited overlap in the two companies, with Maxim’s focus on automotive and datacenter sectors and Analog’s focus very much on industrials and healthcare. Further, if we look at the numbers of both companies, Analog generates 2.4bn in EBIT. Assuming $200million in interest expenses and a 15% tax rate, earnings come in at around $5.04 per share. With Maxim added, EBIT will increase towards $3.1bn as net debt will come down, reducing interest payments to an estimated $160million. After applying the presupposed tax rate of 15%, this results in earnings of $2.5bn. With 171million shares to be issued to Maxim’s shareholders, the total share count will increase towards 542million, which in turn results in earnings falling to $4.61 per share. This could explain the roughly 10% drop in Maxim’s share price when the deal was announced, with investors potentially cautious the premium Analog is paying may be a little too high. Having said that, time will tell how the synergies affect the new company and whether the premium was a price worth paying. Nonetheless, there exist significant risks: regulatory and pro forma.
“The exciting announcement with Maxim is the next step in ADI’s vision to bridge the physical and digital worlds. ADI and Maxim share a passion for solving our customers’ most complex problems, and with the increased breadth and depth of our combined technology and talent, we will be able to develop more complete, cutting-edge solutions,” — Vincent Roche, President and CEO of ADI.