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With $21 billion Maxim deal, Analog goes for scale in the chip wars

The Norwood chip maker Analog Devices is buying Maxim Integrated in an all-stock deal.
The Norwood chip maker Analog Devices is buying Maxim Integrated in an all-stock deal.Steven Senne/Associated Press

Like many of us, the Norwood chip maker Analog Devices Inc. is putting on weight during the COVID-19 crisis. But the company’s $21 billion deal to acquire Silicon Valley rival Maxim Integrated Products Inc. is all about adding more muscle, in a bid to challenge the dominant analog chip company, Texas Instruments.

The Maxim acquisition will yield a Massachusetts-based company with a combined $8.2 billion in 2019 sales and a market valuation of about $68 billion.

“In an increasingly competitive industry, scale matters,” said Analog Devices’ chief executive, Vincent Roche, during a Monday conference call announcing the all-stock transaction, which is expected to close next summer. It’s the third-biggest acquisition in the United States so far in 2020 and the fifth-biggest worldwide, according to the mergers and acquisitions tracking firm Dealogic.

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Analog chips don’t get as much attention as the digital microprocessors and flash memory chips found in computers and phones. But these machines could barely function without analog chips, which process real-world inputs like voices, images, and even the electrical current that powers our devices. The analog chips in your phone turn light into digital photographs, translate spoken words into text messages, and regulate power consumption so the battery can last all day.

According to the investment firm Bernstein Research, global sales of analog chips hit $54 billion in 2019. That’s a small fraction of the $419 billion spent on all types of semiconductors last year. But demand for analog chips is outpacing the overall chip market. Because a single digital system often needs the support of multiple analog chips, “you’re seeing more and more analog as we get more and more digital,” said Mario Morales, a semiconductor analyst for IDC Corp.

Analog Devices is already one of the top makers of analog chips, with 2019 sales of $6 billion and a market capitalization of $46 billion. It has made multiple acquisitions in recent years, including the $2 billion purchase of Hittite Microwave in 2014 and the $15 billion acquisition of Linear Technology in 2016. But Analog is still dwarfed by Texas Instruments, which has a market capitalization of $120 billion and 2019 sales of $14.4 billion.

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Post-acquisition, the unified company will employ 10,000 engineers, many of them masters of the arcane art of analog chip designs. Such people aren’t easy to find.

“We continue to see a decline in the number of hardware engineers,” said Roche, even as demand for their skills continues to grow. “We believe to win in this environment, ADI needs to be the destination where the world’s best analog engineers want to work.”

And, while Analog’s chief financial officer, Prashanth Mahendra-Rajah, predicted the merged companies would achieve $275 million in cost savings within two years, the cuts won’t be coming from the engineering ranks. “Our goal is to retain most if not all of that talent,” Mahendra-Rajah said. “The goal is to innovate, to grow, not to really cut.”

In addition, the company plans to spend $1.5 billion on research and development annually.

While Morales said the deal will strengthen Analog Devices’ competitive position, he doubted that Texas Instruments would lose any sleep over it. That company had also considered acquiring Maxim, but decided its analog chip business was strong enough on its own, Morales said. Instead, he expects Texas Instruments to seek further growth by building up its $3 billion business in low-powered embedded digital processors and microcontrollers, like those found in industrial equipment.

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Shares of both Analog Devices and Maxim have ridden a roller coaster this year — strong in the first two months, followed by a brutal selloff in March as the pandemic took hold. But both companies saw their shares rebound beginning in April. At the close of trading Monday, Analog shares were down 5.8 percent at $117.25, while Maxim’s gained 8.1 percent to $69.29. Texas Instruments shares were down 1.3 percent to $128.82.


Hiawatha Bray can be reached at hiawatha.bray@globe.com. Follow him on Twitter @GlobeTechLab.