We Like Analog Devices' Deal for Linear Technology
The reasonably priced merger will create an analog powerhouse.
We like the strategic rationale behind Analog Devices’ (ADI) acquisition of Linear Technology (LLTC) for approximately $60 per share, composed of $46 per share in cash and 0.2321 share of ADI stock. We believe the merger will create an analog powerhouse that will rival industry leader Texas Instruments (TXN), as ADI’s strength in data converters and signal processing should pair well with Linear’s focus on power management chips. Given the fragmented nature of the analog industry, we would expect this deal to clear any regulatory hurdles. We wouldn’t rule out another bid for Linear (TI appears best equipped to be a bidder, given its size in the industry), but with the $60 deal price representing a 30% premium to our $46 stand-alone fair value estimate for Linear, we would err on the side of locking in gains now. We have raised our Linear fair value estimate to $60 per share and are maintaining our $61 ADI fair value estimate, as future operating expense synergies should more than offset the quite reasonable 24% premium paid for a high-quality analog leader. We are maintaining our wide economic moat ratings for both firms.
Analog Devices will issue about 58 million new shares to fund the deal as well as take on $7.3 billion of new long-term debt to help pay for the cash portion. ADI expects to maintain an investment-grade rating on its debt, while interest rates on the bonds should hover around 3%. Although ADI-Linear will fall into a net debt position, we foresee strong free cash flow generation over time that should allow ADI to service the debt as well as maintain its current dividend policy (ADI did indicate that stock buybacks are likely to be suspended for a while).
Brian Colello does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.