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Texas Instruments’ Acquisition of National Semiconductor

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Agenda

About the Companies

Industry Analysis

Transaction Details

Pros and Cons of the Deal

Valuation (Relative and DCF)

The Synergies Involved

Integration procedures

How have the synergies evolved?

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About the Companies

An American company that designs and makes semiconductors, which it sells to electronics designers and manufacturers globally3rd largest manufacturer of semiconductors worldwide, the 2nd largest supplier of chips for cellular handsets, and the largest producer of Digital Signal Processors (DSPs) and analog semiconductorsRevenue: USD 12.82 billion (2012)After the acquisition of National Semiconductor in 2011, TI became the world’s largest maker of analog technology components

It was an American semiconductor manufacturer, that specialized in analog devices and subsystemsTheir products included power management circuits, display drivers, audio & operational amplifiers, and communication interface products Revenue: USD 1.42 billion (2010)National's key markets included wireless handsets, displays and a variety of broad electronics markets, including medical, automotive, industrial and test & measurement applicationsIn September, 2011, the company formally became a part of Texas Instruments as the "Silicon Valley" division

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Analog Industry Analysis (2010) Within the semiconductor industry, the analog segment had been remarkably profitable and stable till 2010 The analog sector, though maturing, was on the verge of significant changes, based on existent supply and

demand. New competitors were expected in the segment as demand continued to heat up and diversified across segments and applications simultaneously, and shortages increased in duration and further tightened the marketplace while increasing revenue opportunities

• Projection of the analog segment to grow twice as fast as the semiconductor market (2010-14)Strong Growth

• Analog players exhibit gross margins of 40 to 70% — generally higher than margins obtained in the digital segment (lower capex)Healthy Margins

• The heterogeneity of products, process technologies and applications creates opportunities for various companies and prevents an oligopoly

Opportunities for various companies

• Market share for most analog players had remained relatively constant over the last decade (2000-10)Stability in the industry

• Several industry players were in the process of establishing capacity of 300 mm wafers, which would lead to a 20-30% reduction in front-end manufacturing costs

Transition from 200 mm to 300 mm wafers

Evaluation of the Analog subsector Source: ‘Will analog be as good tomorrow as it was yesterday?’ (2010) by Mahindroo, Rosensweig and Wiseman

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On 4th April, 2011, Texas Instruments Inc. (TI) agreed to acquire its rival National Semiconductor Corp. (NSM) for USD 6.5 billion in cash

The deal united two of the most venerable names in the industry at the time

TI agreed to pay USD 25 for each share of National Semiconductor, a hefty premium of 78% over NSM’s closing price of USD 14.07 the previous day

The purchase was funded with a combination of existing cash balances of USD 3.07 billion and newly issued debt

Morgan Stanley provided USD 2.5 billion in a bridge loan to TI

About the Transaction

NSM: $14.07 to $24.45 (74%)

TI: $36.63 to $34.11 (1.5%)

Stock Price Movement on the day of the deal Announcement

4th April, 2011 – Deal announced

23rd September, 2011 – Deal closed

Important Dates

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Pros and Cons of the Deal before the Announcement

TI would reverse its sales slump and profit from NSM’s higher margins

The deal reaffirmed TI’s commitment to analog chips (NSM’s specialty). With NSM, TI could now add new analog products faster than it could on its own

TI would get the opportunity to boost National’s revenue by deploying its highly motivated sales force

TI would get to add about 12,000 new products to its portfolio along with seasoned, scarce analog engineers and reach new markets

TI would put to good use the USD 3 billion surplus cash on its balance sheet. Surplus cash was generating very meager returns at the time

Since TI would be tapping the investment market for financing at a time of low interest rates, it would result in rapid, strong returns on the investment

NSM’s sales had been declining for the past 4 fiscal years, presenting a major challenge for TI. NSM was a struggling rival, with less than USD 1.5 billion in annual sales

A 78% premium seemed way too much, according to several analysts

The transaction would increase TI’s market leverage and attract regulatory scrutiny

TI, a zero-debt company, would be taking on debt to finance the deal

Integration of NSM personnel into TI posed a challenge

The Advantages The Disadvantages and Challenges

As the various benefits to TI outweighed the disadvantages and challenges, TI went ahead and announced its acquisition of NSM on 5th April, 2011

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Valuation of National Semiconductor (1 of 2)

2010 Gross Margin 2010 Operating Margin 2010 Growth 3/31/2011

Market Cap P/E (ttm) P/S (ttm)

National Semiconductor 69% 30% 27% 3.50 11.30 2.30Linear Tech 78% 52% 61% 7.60 15.40 5.30ADI 66% 35% 35% 11.80 14.80 4.10Maxim 61% 26% 40% 7.60 31.20 3.30Average (Linear Tech., ADI, Maxim) 68% 38% 42% 9.00 20.47 4.23National Semiconductor at Offer Price 6.50 20.00 4.10

Relative Valuation

Linear Tech: A member of the S&P 500, has been designing, manufacturing and marketing a broad line of high performance analog integrated circuits for major companies worldwide for three decades

ADI: ADI or Analog, is an American multinational semiconductor company specializing in data conversion, and is a leading manufacturer of analog, mixed-signal and digital signal processing integrated circuits (ICs)

Maxim: Maxim Integrated is an American, publicly traded company that designs, manufactures, and sells analog and mixed-signal semiconductor products

Peers Chosen

The Valuation of National Semiconductor done (on the basis of Relative Valuation) was almost 2 times NSM’s multiples, but very similar to the industry averages

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Valuation of National Semiconductor (2 of 2)

Cost of EquityRisk free Rate Assumption 4.30%Fundamental Beta 1.29Estimated Equity Risk Premium 6.50%Cost of Equity 12.685%

After-tax Cost of DebtRisk free Rate Assumption 4.30%Synthetic Credit Spread NACost of Debt Assumption NATax Rate Assumption 23.00%After-tax Cost of Debt 13.09%

Cost of Preferred StockPreferred Dividends 0Value of Preferred Stock 0Cost of Preferred Stock 0

Capital StructureWeight of Equity 37.85%Weight of Debt 62.15%Weight of Preferred Stock 0%

WACC 12.94%

(All values in million USD except per share price)Intrinsic Value of Capital 3743.10Intrinsic Value of Common Stock 3467.46Diluted Shares Outstanding 235.10Intrinsic Value of Common Stock (per share) 14.75

DCF Valuation

RR 0.810ROIC 58.90%g1 47.71%g2 36.56%g3 25.40%g4 14.25%Perpetual growth rate, g5 3.10%

(Million USD) FCFF(i) or Terminal Value PV at 12.94% FCFE (i) or Terminal

ValuePV at

12.685%Period 1 207.36 183.61 160.93 142.81Period 2 283.17 222.01 236.73 186.44Period 3 355.10 246.52 308.67 215.72Period 4 405.71 249.39 359.28 222.83Period 5 418.29 227.67 371.86 204.67Terminal Value 4802.47 2613.90 4533.14 2494.99

WACC = 12.94%Cost of Equity = 12.685%Perpetual growth rate = 3.1%

Price Offered: $25.00

Intrinsic Value of

NSM: $14.75

Market Price of NSM:

$14.07

Premium paid over the Market Price: 77.68%Premium paid over the Intrinsic Value: 69.49%

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2010 Data TI NSM TI + NSM

Revenue USD 13.97 bn USD 1.56 billion USD 15.53 billion

Gross Margin 53.6% 69.0% 55.2%

R&D as a % of Revenue 11.2% 17.9% 11.9%

SG&A as a % of Revenue 10.9% 19.3% 11.7%

Operating Profit USD 4.51 billion USD 0.47 billion USD 4.98 billion

Operating Margin 32.3% 29.8% 32.1%

EPS USD 2.62 USD 1.25 USD 2.91

Cash flow from Operations USD 3.82 billion USD 0.41 billion USD 4.23 billion

The Synergies Involved (1 of 3)

Visible increase in Revenue, Gross Margin, Operating Profit and EPS when the firms combine

The combined Return on Invested Capital (ROIC) would exceed TI’s cost of capital within 3 or 4 years

Financial Synergies

Source: Texas Instruments’ investor presentation (2010)

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The Synergies Involved (2 of 3)Operational Synergies

43%

15%

9%

12%

21%

TI Revenue = USD 13.97 billion (2010)

Analog

Embedded Process-ing

Wireless

Baseband

Other

49%

13%

8%

11%

19%

TI + NSM Revenue = USD 15.53 billion (2010)

Analog

Embedded Process-ing

Wireless

Baseband

Other

The deal accelerates TI’s transformation into a firm focussed on Analog, Embedded Processing and Wireless technologies

The core business of National Semiconductor (Analog) easily aligns with TI’s increasing focus on Analog

The core business (Analog + Embedded Processing + Wireless) would contribute to over 70% of the total revenue (as of 2010)

NSM’s industrial strength would also complement TI’s

Source: Texas Instruments’ investor presentation (2010)

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The Synergies Involved (3 of 3)The Strategic Rationale

National Semiconductor’s (NSM’s) 12,000 analog products would add to Texas Instruments’ (TI’s) current portfolio of 30,000 analog products, making the combined firm to have a market share of 17% (increase of 3%) in the global vast and fragmented analog market

National's power control chips and the customers for those products will be a welcome addition to the TI product line and customer base

TI, with its large sales organization, aims to remedy NSM’s current insufficient ability of merchandizing its products. NSM’s products would get more sales throughput

The acquisition brought out the world’s first 300 mm analog factory. The factory is equipped with larger wafers and tighter process geometries, which brought about important cost savings

The timing of the deal was perfect because of the state of the semiconductor business and financial markets in 2011 Semiconductor manufacturers like TI were in a good cash position, and TI was using this surplus cash to

expand its manufacturing capacity Debt was also available at a cheap rate, so TI used existing cash and new debt to finance the deal

Overall, the decision to acquire National Semiconductor was a wise decision with moderate synergies taking advantage of the existing market scenarios

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Steps taken to ensure a Smooth Integration

Both firms realized the importance of a seamless integration process

Hence, integration was a key focus for both firms, TI and NSM

Product Integration: The focus was not just integration on a chip, but also inductors, FETs, DC/DC converters and so on

Key focus on Integration Creation of “Silicon Valley Analog”

“Silicon Valley Analog” was created as a 4th Business Unit (BU) after the acquisition

This structure was designed to make the integration of the teams as simple and seamless as possible so that TI could direct its energy to providing more solutions and engaging with more customers

Other measures taken

Technology sharing sessions were held to foster collaboration between both firms’ engineering teams and to accelerate innovation

If product overlap occurred, TI continued to offer both firms’ offerings, so that customers continued to count on TI to make products as long they are technologically capable of doing so. Obsolescence was a last resort at TI

Both firms enjoyed similarities in cultures, so cultural integration was never a problem

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How have Synergies evolved? (1 of 2)

Financial Component Absolute Value (2012) Remarks

Analog Revenue USD 6.998 billionIncreased by USD 623 million or 10% due to the inclusion of a full year of SVA

Goodwill USD 3.528 billion

Other Intangible assets USD 2.96 billion

Debt assumed by TI USD 1.105 billion TI assumed outstanding debt from NSM’s books

R&D expenses Increased by 9% in 2012

SG&A expenses Increased by 10% in 2012

Interest and debt expenses USD 42 million Put pressure on margins

Operating ProfitOperating Profit as a % of revenue reduced from 21.8% (2011) to 15.4% (2012)

Financial Perspective

Source: Texas Instruments’ Annual Report (2012)

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Products acquired through the purchase included power management, data converter, interface and operational amplifier catalog analog products, nearly all of which are complementary to TI’s other Analog products

After the acquisition, TI grew its free cash flow to almost USD 3 billion (23% of revenue). This was a direct result of more revenue coming from Analog and Embedded Processing

Ever since the acquisition was completed, TI has gained share in the Analog and Embedded Processing markets, and they have continued to wind down their baseband operations

Revenue from a full year’s inclusion of SVA slightly more than offset lower revenue from Wireless baseband products

TI now has the ability to develop their own process technologies and means that their engineers can get access to state-of-the-art processes for developing their circuits

TI now has the industry's largest analog design team and more than 4 million sq. feet of manufacturing capacity

The National acquisition has given TI a significant footprint in Silicon Valley for the first time. TI is using this opportunity by the opening of TI Silicon Valley Labs and they have tied up with universities (Stanford, Berkeley) to further strengthen key engineering undergraduate programs.

TI’s management has been blown away by the innovative thinking and the kinds of technology that SVA has been developing

Strategic Perspective

How have Synergies evolved? (2 of 2)

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Important References

Texas Instruments’ Annual Report, 2012 Texas Instruments’ Investor Presentation, 2010 National Semiconductor’s Annual Report, 2010 ‘Will analog be as good tomorrow as it was yesterday?’ (2010) by Mahindroo, Rosensweig and

Wiseman http://investor.ti.com/releasedetail.cfm?ReleaseID=607786 Objective Analysis: Semi-Conductor Market Research http://en.wikipedia.org/wiki/Texas_Instruments http://en.wikipedia.org/wiki/National_Semiconductor http://online.wsj.com/article/SB10001424052748703712504576243133367045662.html http://www.eetimes.com/document.asp?doc_id=1279562 http://www.eetimes.com/document.asp?doc_id=1259147 http://www.telegraph.co.uk/finance/newsbysector/mediatechnologyandtelecoms/electronics/

8428440/Texas-Instruments-to-buy-National-Semiconductor-for-6.5bn.html http://www.analog-eetimes.com/en/ti-s-integration-strategy-for-national-semiconductor-devices-

begins-to-take-shape.html?cmp_id=7&news_id=222902839

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Texas Instruments’ Acquisition of National Semiconductor

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