Analysis of Texas Instrument

TI is a typical foundry model of Integrated Device Manufacturers, IDM, which design and manufacture semiconductors by themselves. TI founded in 1930, and is corporate in

WAFER

Delaware, headquartered in Dallas, Texas, and has design, manufacturing or sales operations in more than 30 countries, and it is the world 4^th largest semiconductor company in 2010 as measured by revenue according to Gartner’s investigation.

TI owns and operates semiconductor manufacturing facilities in North America, Asia and Europe. These include both high-volume wafer fabrication, assembly and field test facilities that require substantial investment to construct and are largely fixed-cost assets once in operation. Because TI owns many manufacturing capacities, a significant portion of TI’s operating cost is fixed, and it is inflexible when the market is during the down cycle. In general, these fixed costs do not decline with reductions in customer demand or utilization of capacity. Therefore, TI needs to keep manufacturing products to dilute the fixed cost even the down cycle, and launches price competition to sell products as more as possible.

In order to lower the expense in keeping investing advanced fabrication processing technology like 90nm, 65nm or more advanced, and maintain the utilization of the capacity. TI manufactures Analog products and most of our Embedded Processing products by using older, less expensive equipment, and outsources the advanced logic products, such as Wireless products. Advanced logic wafer manufacturing continually requires new and expensive processes and equipment. In contrast, the processes and equipment required for manufacturing our Analog products and most of our Embedded Processing products do not have this requirement.

To supplement our internal wafer fabrication capacity and maximize our responsiveness to customer demand and return on capital, our wafer manufacturing strategy utilizes the capacity of outside suppliers, commonly known as foundries, like TSMC. TI sources about 25 percent of our wafers from external foundries, with the vast majority of this outsourcing being for advanced logic wafers. In 2010, external foundries provided 60

percent of the fabricated wafers for our advanced logic manufacturing needs. TI expects the proportion of our advanced logic wafers provided by foundries will increase over time. TI expects to maintain sufficient internal wafer fabrication capacity to meet the vast majority of its own analog production needs.

In addition to using foundries to supplement TI’s wafer fabrication capacity, TI selectively use subcontractors to supplement our assembly/test capacity. TI generally use subcontractors for assembly and filed test of products that would be less cost-efficient to complete in-house (e.g., relatively low-volume products that are unlikely to keep internal equipment fully utilized), or when demand temporarily exceeds its own internal capacity. TI believes it often has a cost advantage from maintaining internal assembly and field test capacity.

TI’s internal and external manufacturing strategy reduces the level of our required capital expenditures, and thereby reduces our subsequent levels of depreciation below what it would be if we sourced all manufacturing internally. Consequently, TI experiences less fluctuation in our profit margins due to changing product demand, and lower cash requirements for expanding and updating its manufacturing capabilities.

TI has three major product lines which are Analog, Wireless, and Embedded Processing, and the revenue distributions are listed in Table from 2008 to 2012.

Table 4.1 Revenue of Texas Instrument, 2008~2011

2008 2009 2010 2011

Amount Ratio Amount Ratio Amount Ratio Amount Ratio Analog 4,789 38.31% 4,202 40.30% 5,979 42.81% 6,375 46.41%

Wireless 3,451 27.61% 2,626 25.18% 2,978 21.32% 2,518 18.33%

Embedded consumption. Sales to TI’s analog segment’s more than 80,000 customers generated 43 percent of our revenue in 2010. According to Databeans’ research, the worldwide market for analog semiconductors was about $42 billion in 2010. TI’s analog segment’s revenue in 2010 was about $6 billion, or about 14 percent of this market, the leading position

Wireless

The growth dynamitic of wireless products comes from enabling connectivity through the cellular network (such as Bluetooth® devices, WiFi networks, GPS location services, and Near Field Communication (NFC)). TI’s wireless products which could be used in cell phones, tablet computers and other emerging portable devices generated about $3 billion, or 21 percent of our revenue, in 2010, with a significant portion of those sales to a single customer, Nokia.

TI’s Wireless investments are concentrated on its connectivity products and OMAP applications processors, areas we believe offer significant growth opportunities and

which will enable us to take advantage of the increasing demand for more powerful and more functional mobile devices

Embedded Processing

TI’s Embedded Processing products include our DSPs and microcontrollers. DSPs perform mathematical computations almost instantaneously to process or improve digital data. Microcontrollers are designed to control a set of specific tasks for electronic equipment.

Sales of Embedded Processing products generated 15 percent of our revenue in 2010.

According to external sources, the worldwide market for embedded processors was about $18 billion in 2010. TI’s Embedded Processing segment’s revenue in 2010 was about $2 billion, or about 11 percent of this fragmented market.

Embedded Processing products are used in many different applications and custom Embedded Processing products are used in specific applications, such as communications infrastructure equipment and automotive.

TI’s 2011 revenue was $13.73 billion which is slightly decreased compared to 2010, but net income was $2.24 billion which was less than $992 million compared to 2010.

Gross profit in 2011 was $6.77 billion, a decrease of $720 million, or 10 percent, from 2010. The reasons are

1. Restructuring from the earthquake in Japan

2. Semiconductor downturn began in the third quarter, 2011

3. A combination of decreasing order, lower revenue, lower average levels of factory utilization as we reduced production in response to weaker demand. Lower factory utilization decreased our gross profit by $175 million from the year-ago period 4. Acquisition-related charges reflected in cost of revenue and inventory charges

Table 4.2 Profit of Texas Instrument, 2011

2011 2010 YoY

Revenue 13,735 13,966 (1.68%)

CoGS 6,963 6,474 7.02%

Gross profit 6,772 7,492 (10.63%)

Gross margin 49.30% 53.64%

SG&A 1,638 1,519 7.26%

Operating profit 2,992 4,514 (50.87%)

Operating margin 21.78% 32.32%

*the number excludes NS’ revenue

Unit: M USD Source: TI’s annual report, 2011

Acquiring National Semiconductor

TI acquired National Semiconductor (NYSE:NSM) for $6.5 billion in cash on 23^rd, September in 2011. TI financed this deal with cash and debt, and believed it can recover TI’s investment with three to four years. In this study, we think this is the key reason why TI acquired NS within 73% premium.