Analog Devices Inc. agreed to acquire rival Maxim Integrated Products Inc. for $20.9 billion in stock, heralding what may develop into a new round of consolidation in the $400 billion semiconductor industry.
Analog Devices will pay 0.63 share for each Maxim share, representing a 22% premium to Maxim’s closing share price on Friday, the two companies said in a statement early Monday. Analog Devices shareholders will own about 69% of the combined company, which will be valued at about $68 billion including debt, the companies said.
The acquisition of San Jose, California-based Maxim creates a larger rival for Texas Instruments Inc. in the market for analog and embedded processor chips, crucial components in the spread of computing and intelligence to everyday devices. Analog Devices shares slipped 4.3% to $119.16 at 11:36 a.m. in New York. Maxim was up 11% to $71.02.
After a lull in such combinations caused by trade tension between China and the U.S. and regulatory holdups, Nvidia Corp. won approval for its acquisition of Mellanox Technologies Ltd. in the Asian country earlier this year, creating new confidence that deals such as the Maxim purchase can go ahead. Analog Devices Chief Executive Officer Vince Roach said he’s confident the transaction will close within a year.
“The skills that we have are becoming increasingly scarce,” he said in an interview. “Now we have 10,000 engineers to point at a $60 billion opportunity. It brings us more scope.”
Analog Devices also raised its revenue forecast for the current quarter to about $1.45 billion from an earlier target of about $1.32 billion. Profit will be about 91 cents a share compared with an earlier target of 72 cents.
Acquisitions in general are starting to return after several quiet months while companies dealt with the fallout from the Covid-19 pandemic. The move by Analog Devices comes on the heels of Uber Inc. announcing a $2.65 billion deal for Postmates Inc., Allstate Corp. agreeing to a record $4 billion takeover of National General Holdings Corp. and Warren Buffett’s Berkshire Hathaway Inc. spending roughly the same amount on a gas pipeline and storage assets.
Some chip deals have either been delayed or abandoned if they require approval in China, the world’s largest market for semiconductors. The U.S. is home to the biggest chunk of the world’s producers of the electronic components.
Roach said he chose to go with a stock-based transaction rather than cash to reduce the possible impact of volatility in the market for his products caused by the pandemic. While he’s known his counterpart at Maxim, Tunc Doluca, for years, the two never met face-to-face during the negotiations.
The transaction isn’t about cost cutting, Roach said. Maxim will give ADI more scope and abilities in markets such as automotive, communications – where it will add more fixed-line assets, and digital healthcare, he said.
Analog Devices is currently less than half the size of market leader Texas Instruments by revenue. While Maxim wouldn’t allow it to close the gap totally, it would broaden the range of products in the analog portfolio, something that Texas Instruments has touted as helping to cement its dominance.
All three companies specialize in analog and embedded computing components. Once a sleepy backwater of the industry, this segment has enjoyed a resurgence as the list of uses and customers has grown in recent years. Analog chips convert real-world things like sound and pressure into electronic signals, and the rush to add automation to factory equipment and buildings and to move cars toward a world where they won’t need human drivers has stirred new demand.
It’s also a very profitable area of the chip industry. Analog Devices and Maxim have gross margins, or the percentage of sales remaining after deducting the cost of goods sold, in the region of 65%.
Since 2015, the Philadelphia Stock Exchange Semiconductor Index has tripled in value. The benchmark index now has a market capitalization of more than $1.5 trillion. Over that same period, chip companies have been increasingly consolidating to help them lower costs and serve customers that have done the same. Their earnings have become more predictable and their cash generation has provided them with war chests and the ability to carry debt they couldn’t have sustained in the past.