ADI-Maxim Deal: Where’s ADI Headed?

Article By : Bolaji Ojo

Where's ADI headed? I would like to sneak inside the head of Vincent Roche and wander around its corridors. My quest is simply to figure out what is next on the agenda at Analog Devices.

Where’s ADI headed? I would like to sneak inside the head of Vincent Roche and wander around its corridors. My quest is simply to figure out what is next on the agenda at Analog Devices where Roche is president and CEO. Analog Devices today announced it would pay $21 billion for Maxim Integrated in an all-stock transaction and many observers believe the transaction is a good move for the two.

Analysts reviewing the deal have been obsessing over details of the transaction.

Stop.

Instead, focus on what Analog Devices plans to do next and why.

Askː What is the longer-term plan Roche and ADI’s board of directors have for the company? As president since 2012 and CEO since 2013, Roche should know. He was the architect of the company’s biggest acquisition till date, that of the $15.8 billion purchase of Linear Technology in 2017.

By next summer, ADI expects to conclude the Maxim acquisition. Which brings me back to the question; What is the grand plan here? My passion is putting together plausible answers for such riddles. I have done some homework and will assemble a clearer picture soon. For now, let us say thisː ADI is hungry for the analog crown. It is also haunted by the fear of losing what it currently has and becoming irrelevant in a fast-changing market.

There is no fear currently of that happening but standing still is also not an option. So, ADI will likely make more acquisitions, some of them small, tack-on deals but it will eventually — I predict in the next 2 years — make another humongous transaction. Because it must.

If you are a supplier to ADI, a distributor serving the company, a direct competitor, a player in an adjacent market, an investor or shareholder or a financial analyst, I suggest thisː stop looking in the rearview mirror. (Full disclosureː Aspencore, publisher of EE Times is owned by Arrow Electronics, a major partner of Analog Devices.)


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The Maxim deal is already history. Regulators may delay its closing and some outside the United States may even try to scuttle it. But it will eventually get approved because the reasons for attacking it will quickly be shown to be untenable.

ADI will conduct a well-executed integration of Maxim. It has the expertise in-house and they have some experience doing this. The company is already at work on the integration, reaching out to ADI’s and Maxim’s customers, suppliers, and investors. They are assuring employees, determining new roles for key staffers, assessing facilities, including production, and packaging sites, and reviewing cost-saving opportunities to gain the promised synergies.

This is not work for people at Roche’s level. His task is to keep a tab on what is going on and make sure the integration is on target. In the meantime, he is moving on to the next item on the company’s bigger, broader, and more comprehensive plan. Like in the case of Linear Technology, the Maxim deal is merely a target, something to be added to the kitty on the road to ADI’s real objective. Both Linear and Maxim are the building blocks but what is ADI constructing?

You would have missed the big picture if you focused on the list of short-term objectives ADI and Maxim put out today – the ones about cost-reductions of $275 million, capitalization on new growth opportunities, delivering of innovative solutions, the increased diversification of offerings, enhanced breadth of engineering capabilities, and so on. You would have lost the chance to be a better, more useful partner, investment analyst or competitor.

Now, where is that portal to Mr. Roche’s head?

Maxim Gives ADI ‘Tailwinds’ for Future M&A Deals

Vincent Roche told investors last May that ADI had “tailwinds” at its back. He might have been subtly referring to events that have culminated in the proposed acquisition of Maxim Integrated announced today but it wouldn’t be wrong to immediately put that deal behind ADI and look even farther out.

ADI typically wades every 3 years or so into the M&A market, progressively ramping up the size of each successive deal “to take advantage of the [market] disarray,” as Roche, president and CEO of the company, said while discussing fiscal second quarter results two months ago. Valued at about $21 billion, the Maxim deal eclipses the $15.8 billion paid for Linear Technology Corp. in 2017.

Stock-swap
Concerns have risen that semiconductor M&A activities might be petering out but there are s

till opportunities for massive, strategic deals and ADI might be well-positioned to be the next major IC industry consolidator. The company structured the Maxim transaction as a stock-swap, ensuring it would not need to dip into its cash reserves or add to its $5 billion in long-term debt. More importantly, Maxim had a net-cash position of some $700 million as at the end of its March quarter, which will boost ADI’s war chest, giving it more ammunition for future acquisitions.

“With the increased breadth and depth of our combined technology and talent, we will be able to develop more complete, cutting-edge solutions,” Roche said, in a statement. “Together, we are well-positioned to deliver the next wave of semiconductor growth, while engineering a healthier, safer and more sustainable future for all.”

This is a deal both companies must have felt compelled to make, hence the decision to fashion it as an all-share transaction. ADI could have funded the deal by taking on more debt, but this would have brought further shareholder scrutiny. By issuing shares, ADI skips numerous hurdles while Maxim shareholders get a nearly one-thirds ownership in one of the semiconductor market’s better-performing entities. Maxim shareholders may not get to cash-out now, but the promise of even better equity performance in future must have been quite compelling.

ADI, the big winner
On many levels, ADI is a big winner here. It gets to absorb a competitor in several of its markets; add experienced analog engineers; consolidate operations and squeeze out costs; establish a deeper relationship with customers; and increase its size to better compete against its main rivals. All of these comes without straining its finances. With another competitor set to be removed from the analog IC market and as pricing pressures combined with OEMs’ desire for one-stop solutions and systems providers, other players in the segment will undoubtedly face pressures to pool resources via mergers or put themselves up for sale.

The entire analog market is experiencing sales pressures due to problems in key sectors, including automotive, offset in the case of Analog Devices by surging demand from the healthcare equipment industry. Market leader, Texas Instruments, for example is forecast to post sales of $12.4 billion this year, down nearly 14 percent, from $14.4 billion in 2019. Analysts predict TI’s sales will rebound in 2021, to a consensus estimate of $13.9 billion.

ADI has so far managed to better deflect the potential negative impact on earnings and margins. Despite the outsized acquisition of Linear Technology, Norwood, Mass.-based Analog Devices has struggled to boost sales in the last couple of years although it has reported stronger performance in the ongoing quarter. After hitting a high of $6.2 billion in the fiscal year ended Oct. 30, 2018, ADI’s sales dropped to $6 billion on a GAAP-basis in fiscal 2019. They are projected to slide to $5.27 billion in the current fiscal year before bouncing back in fiscal 2021.

The purchase of Maxim, which ADI said would give the combined company pro-forma sales of $8.2 billion — based on their fiscal 2018 performance — is a lifeline for both parties. ADI shareholders, investors and financial analysts will no doubt laud the Maxim deal because of the expected cost-saving “synergies” but it has a greater implication for the Norwood, Mass.-based company and the entire semiconductor market. This deal pumps up ADI’s size, making it a leading consolidator and less of an acquisition target. For Maxim, it marks the end of a long and somewhat failing effort to bulk up sales and reach in order to better match its rivals.

Maxim has been putting up a solid fight, but its latest results and analysts’ consensus sales estimates point to increasing challenges for the company. For its recent fiscal year ended June, analysts are projecting revenue of $2.16 billion for the company, down from $2.31 billion and $2.48 billion in fiscal 2019 and 2018, respectively. Analysts do not currently expect an improvement for fiscal 2021, either. They see sales flat for fiscal 2021 at roughly $2.18 billion. In April, Maxim itself, citing “constraints on our manufacturing operations,” projected June quarter sales would be in the range of $480 million to $540 million, a fairly large spread compared with the year-ago quarter revenue of $556.5 million.

 

San Jose, Calif.-based Maxim had other pressing problems that made it a potential target to acquirers that had been sniffing around the company for years. Its mid-60s gross profit margins are sufficiently strong enough to attract suitors while the operating margins at 32 percent give the impression a buyer could squeeze value out of Maxim through a rigorous cost-reduction program that would result in even better profits.

ADI is such a candidate. At 70 percent — on a non-GAAP basis — ADI’s gross profit margins are among the highest in the industry. The company’s operating profit margin of 41 percent also attest to its strength at keeping costs down, which it expects to leverage on the combined enterprise. ADI said it expects to boost the ADI-Maxim combo’s gross profit margins up to 69 percent and lift operating margin to 38 percent. It sees costs reduction in the range of $275 million, helping to boost the bottom line.

Kudos not just to the managements of ADI and Maxim but also to lead financial advisor Morgan Stanley and co-financial advisor BoFA Securities who helped to engineer the transaction. Now, they must bring it home.

— Bolaji Ojo is an independent writer focused on business/financial analysis in the electronics industry. Formerly the group publisher of AspenCore Media, he now contributes to EE Times.

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