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08/03/16: Take The Money and Run

By Roger S. Conrad, on Aug. 3, 2016

Analog Devices (NSDQ: ADI) has agreed to acquire Lifelong Income Portfolio holding Linear Technology Corp (NSDQ: LLTC) for $12.87 billion. Shareholders who stick around until the deal closes will receive $46 in cash plus 0.2321 shares of Analog Devices’ common stock.

With our initial position up roughly 33 percent over the past 15 months, we’ve decided to take the money and run.The combination of Analog Devices and Linear Technology will result in a company with more than $5 billion in annual sales and an operating margin of about 38 percent, an impressive level of profitability for such a highly competitive sector.

Analog Devices’ management team expects the company to generate $1.5 billion in free cash in the year after the deal closes and has called for earnings per share of $5.

According to Bloomberg Industries, the two companies would control 14.67 percent of the automotive market for analog chips—considerably less than Texas Instruments’ (NYSE: TXN) more than 20 percent share, but still formidable.

Analog Devices’ 40 percent to 50 percent share makes it the top player in the data converter market, while Linear Technologies is No. 3 in power-management chips. Securing regulatory approval for the deal shouldn’t be a challenge, nor will financing the transaction.

Although hanging on until the deal closes would net us at least two additional dividends, the deal premium is equivalent to roughly 40 quarters’ worth of disbursements; even if Linear Technologies delivers its customary dividend increase in February 2017, the upside for sticking around is negligible.

What about the potential for a rival offer to emerge? Linear Technologies’ stock trades at almost 30 times earnings, compared with Texas Instruments’ price-to-earnings ratio of 22. This lofty valuation could be an impediment to a competing bid.

In the late stages of a bull market, we prefer to take the money and run. Sell Linear Technologies Corp.

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