US Markets
Tuesday, May 28th, 2024 3:25 pm EDT
Key Points
- Elliott Management’s $2.5 Billion Investment and Proposal: Elliott Management has invested $2.5 billion in Texas Instruments (TI) and is urging the company to adopt a “dynamic capacity-management strategy” to improve its free cash flow, potentially increasing it to $9 per share by 2026, which is 40% above current analyst estimates.
- Criticism of TI’s Capital Expenditure Plan: Elliott criticizes TI’s 2022 capital expenditure plan, which significantly increased Capex spending to $5 billion annually from 2023-2026, as it has led to a dramatic reduction in free cash flow and negatively impacted shareholder returns. Elliott believes this rigid plan is misaligned with current market demand for TI’s chips and has caused TI’s stock to underperform compared to its peers.
- Recommendations and Tone of the Letter: Elliott suggests that TI either justify the need for such high capacity expansion or adopt a more flexible approach to Capex, building new facilities more deliberately in response to market demand. The letter, while critical, adopts a less adversarial tone, indicating Elliott is not immediately seeking a confrontational approach with TI’s management or board.
Elliott Management, a prominent $65 billion hedge fund known for its activist strategies, has made a significant $2.5 billion investment in Texas Instruments (TI) and is advocating for changes to improve the company’s free cash flow. In a detailed 13-page letter viewed by CNBC, Elliott proposes that TI adopt a “dynamic capacity-management strategy” aimed at enhancing its free cash flow to as much as $9 per share by 2026, which is approximately 40% higher than current analyst predictions for the world’s largest analog semiconductor maker.
The news led to a temporary 3% increase in TI’s stock price before it stabilized. Elliott argues that TI’s strict adherence to a capital expenditure plan established in 2022 has significantly harmed shareholder returns by drastically reducing free cash flow—a metric by which the company has traditionally been evaluated. According to Elliott, TI’s free cash flow has dropped from $6.40 per share in 2022 to an expected $1.83 per share this year, alienating investors who are attracted to TI’s strong position in the automotive and industrial analog chip markets. As a result, TI’s stock performance has lagged behind its peers over the past two, four, six, and ten years.
Elliott’s letter primarily critiques the 2022 capital expenditure plan, which called for TI to escalate its Capex spending to as much as $5 billion annually from 2023-2026, raising Capex to 23% of revenues from a historical average of about 5%. This investment was intended to nearly double TI’s annual revenues to $30 billion. However, Elliott argues that changes in demand for TI’s chips since the plan’s inception will lead to capacity levels exceeding revenue expectations by 50% in 2026 and 2030.
Jesse Cohn, who heads activism at Elliott, and senior portfolio manager Jason Genrich, who has led activism efforts in companies like Western Digital, Salesforce, and SAP, signed the letter. They question whether TI’s fixed approach to capacity expansion is suitable given the anticipated excess capacity. Elliott recommends that TI either better justify its capacity expansion plans or adopt a more flexible approach to capital expenditures. This would involve constructing new fabrication facilities but equipping them more cautiously to align with market demand.
Notably, the letter adopts a conciliatory tone, suggesting Elliott is not immediately seeking a direct confrontation with TI’s management or board. The only mildly confrontational element appears on page 11, where Elliott accuses the board of failing to uphold prudent capital discipline, urging it to take a more dynamic approach to capacity management.
Elliott declined to comment on the letter, and representatives from TI were unavailable for comment.
For the full original article on CNBC, please click here: https://www.cnbc.com/2024/05/28/activist-elliott-takes-2point5-billion-stake-in-texas-instruments.html
