SAN FRANCISCO (Reuters) - Texas Instruments Inc TXN.N is buying National Semiconductor Corp (NSM.N) for $6.5 billion, paying a hefty near-80 percent premium to merge two of the industry's oldest firms into a dominant force in analog microchips.
The deal, one of the industry's largest in years, sparked a rally in the shares of microchip makers from Nvidia Corp (NVDA.O) to Marvell Technology Group Ltd (MRVL.O), of 2 and 3 on speculation of broader consolidation.
Shares of Texas Instruments fell 1.5 percent to $34.11, while National Semiconductor soared 74 percent to $24.45 in after hours trading.
Analysts say TI seeks to dominate a vast but fragmented market for analog chips -- for instance, power management in wireless devices -- while NatSemi may be open to a deal because of a lack of stronger long-term growth prospects.
"It will improve TI's position in power management chips -- that's where National has particular strength. I'm very curious to hear what they say on the call on their strategy of combining the two firms," said Morningstar analyst Brian Colello.
Executives addressed analysts' questions on a conference call Monday afternoon. Among the top issues was the price tag: some analysts speculate that TI might be hoping to seal a deal and thwart rival bidders.
National Semiconductor's stock performance, down about 9 percent since the end of February, reflects flaccid growth expectations after disappointing investors in recent quarters.
"Texas Instruments has been a pretty prudent company. There is either some kind of buried patent (owned by NatSemi) that is unbelievably attractive to them, or there were other bidders and they felt pressured to get it," said Fort Pitt Capital analyst Kim Caughey Forrest.
"Digital chip makers like Intel (INTC.O) used to disdain analog, but it's the way you get information in and out of these mobile devices.
If it goes through, the deal -- which sources say was brokered by Silicon Valley dealmaker Frank Quattrone -- brings together two of the industry's most storied players.
TI's early employees include Jack Kilby, an inventor of the integrated circuit, while NatSemi was founded in 1959 and in 1966 moved to what is now the cradle of the technology industry: Silicon Valley.
TI, which has been winding down its less profitable baseband mobile telephone business while increasing its stake in analog chips, said it will finance the deal with a combination of existing cash and debt.
The company in recent years has acquired facilities and equipment, giving it the capacity to produce $4.5 billion of analog chips a year in the United States, Japan and China.
Texas Instruments said analog chips will account for 50 percent of its revenue following the acquisition of NatSemi.
Quattrone's Qatalyst Partners and Goldman Sachs (GS.N) Group Inc advised NatSemi on the deal while Morgan Stanley (MS.N) advised Texas Instruments, a source said.
Under the terms of the deal, which has been unanimously approved by the boards of directors of both companies, TI will pay $25 for each share of National Semi's common stock.
"The multiple is about four times sales. If you look at that on a historical basis that's probably average. I do recognize that's a high multiple based on National's price today, but four times sales does not seem too high or too low, especially for a company that generates gross margins in the high 60s," said Tore Svanberg, an analyst at Stifel Nicolaus.