Bigger isn’t always better. But in the market for analog chips, heft has definite advantages.
Just ask Analog Devices Inc., which has spent the past few years scaling up. The chip maker has done 10 mergers in the past six years, including its acquisition of Linear Technology for nearly $15 billion in 2016. Those deals have made the company also known as ADI into a strong No. 2 in the market for analog chips—processors designed for an array of uses such as power management and thermal control. But ADI’s annual revenue is still less than half that of Texas Instruments, which holds such a strong position that it recently decided it can afford to build up inventory to wait out the industry’s current, pandemic-fueled downturn.
ADI’s latest deal won’t fully close that gap. But the $21 billion acquisition of Maxim Integrated Products announced Monday combines the second- and third-largest players in the market for standard linear analog chips, according to Bernstein Research. As such, the resulting company will pick up important scale in key segments such as industrial, automotive, data centers and health care. The two companies have generated a combined $7.7 billion in revenue for their most recent trailing 12-month periods, compared with about $14.1 billion for Texas Instruments.
ADI’s share price slipped 4% Monday morning, likely reflecting some concerns over dilution in the all-stock deal. But the transaction still looks like a smart play in a market where scale can drive more so-called socket wins that tend to be sticky. Bernstein analyst Stacy Rasgon notes that analog chips are typically simpler to produce than their digital counterparts but also harder to design, which means customer wins tend to be durable. ADI Chief Financial Officer Prashanth Mahendra-Rajah said on a conference call Monday that “once you have those sockets, you hang onto them forever.”
The trick is scoring those wins early on, especially in a market in which more chips are going into more products. John Pitzer of Credit Suisse wrote Monday morning that analog-chip buyers are interested in working with “fewer suppliers who can do more,” adding that the combined ADI-Maxim would have “best-in-class end-market exposure” to the industrial, communications and automotive areas. Some things are worth paying up for.
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Chip Makers Scale Up Where It Matters - Wall Street Journal
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