Analog/Maxim: signal boost
Deal looks to be low leverage consolidation without excessive risk on either side
In the semiconductor business, even a $50bn valuation may not be enough. On Monday, Analog Devices announced that it would acquire rival Maxim Integrated Products for $20bn. The augmented Analog will see its enterprise value approach $70bn.
The transaction is among the biggest M&A deals since the coronavirus fallout began in earnest in March. While US equity and debt markets have soared despite an economic and public health crisis, boards of directors have not had the confidence to pull the trigger on game-changing deals. Even if the Analog/Maxim tie-up involves some big numbers, the risk it entails is not excessive for either side.
Analog semiconductors are traditionally the less exciting sibling of digital chips that companies such as Intel make for PCs and smartphones. But the chips have become more interesting in an era of connected devices and automation. Analog free cash flow margins are relatively high because capital costs are less onerous than the broader semiconductor sector.
Analog is using its own shares to acquire Maxim. Maxim shareholders will end up owning 31 per cent of the new company. A theoretical analysis based on the most recent 12-month ebitda of both companies and their respective capital structures suggests Maxim should actually own 29 per cent of the new company. A slight premium to that is, however, understandable since Analog will be taking control. Neither company carries much debt so leverage will not be an issue. The companies project $275m of cost synergies — a juicy figure that reflects most of Maxim’s overhead spending.
Maxim shares jumped about a tenth on Monday to reflect the slight premium it is getting. Analog shares dropped about 5 per cent. This is not a terrible reaction given the size of the deal, especially as most of the benefit of the deal will occur over time if synergy targets are met.
Do not expect an immediate wave of blockbuster dealmaking, even if capital markets remain on fire. But this may not be a bad time for more defensive, low leverage consolidation.