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Elliott Bets $2.5 Billion on Shaking Up Texas Instruments

(Bloomberg) — Elliott Investment Management has invested more than $2.5 billion in Texas Instruments Inc. and is pushing the chipmaker to improve free cash flow, setting the stage for another campaign by the influential activist investor.

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Elliott is proposing a strategy that it believes would let Texas Instruments generate free cash flow of $9 or more per share by 2026. Last year, the tech company had $1.47 a share in free cash flow and was projected to deliver $1.87 this year, data compiled by Bloomberg show.

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“Investors are concerned that TI appears to have deviated from its longstanding commitment to drive growth of free cash flow per share,” Elliott said in an open letter to the company that it published Tuesday.

Those concerns stem from a deliberate strategy shift by Texas Instruments. The company has embarked on an aggressive plan to bring most of its manufacturing back in house, raising its capital spending far above the level of recent years — when it attracted investors with high returns.

Texas Instruments has told shareholders that the push is temporary and that it will eventually restore its focus on dividends and buying back stock. But that outlay, and weaker demand in some markets, has squeezed the amount of cash it has on hand. And the strategy will take years to play out.

“Free cash flow is likely to slow significantly,” Bloomberg Intelligence said in a note earlier this month. “It’s investing $20 billion over four years to support a 2030 sales target of $45 billion that appears optimistic. Dividends may stay intact, but share buybacks and cash-flow margins could be subdued, and any economic setbacks would add pressure.”

Texas instruments rose 0.2% to $199.60 at the close in New York trading, giving the company a market value of about $182 billion. The stock has gained 17% this year.

The Dallas-based company confirmed that it had received the letter and is reviewing it. “As always, our focus is on continuing to make decisions that are in the best interest of TI and all of our shareholders,” it said in an emailed statement.

Texas Instruments’ executives have been explicit about their plans, discussing the strategy in regular capital management calls with analysts as well as earnings updates. They have stressed that the best metric to judge the chipmaker’s performance is the “long-term growth” of free cash flow per share.

In April, executives said that they’ve been deliberately building up cash reserves and increasing debt in order to be able to continue to spend on new plants and equipment — part of the plan they’ve laid out. That heavy outlay will continue for the next three years and then decline, the company has promised.

Texas Instruments also has applied for government support in the form of grants from the Chips and Science Act, a Biden administration measure aimed at boosting domestic chip production.

‘Misses the Point’

“Elliott is arguing not for a blind cut, but rather for more flexibility on spending plans. But this sort of misses the point of Texas Instruments strategy in terms of both future growth potential and the current subsidy environment,” Stacy Rasgon, an analyst at Bernstein, said in a report. “The company clearly believes that the investment today will drive free cash flow, and free cash flow per share, in the future, else they would not be pursuing it.”

The activist investor also said the company should be flexible in its production capacity and adjust according to changing demand from consumers and the industry. The current production target, which was set in 2022, will produce 50% more than revenue expectations would suggest, Elliott said in Tuesday’s letter.

Texas Instruments and its peers have also been struggling with an industrywide slump in chip orders in recent months. But the company’s latest earnings outlook suggested that customers have begun to resume ordering chips after working through a glut of components. In April, the company projected sales in the current period of as much as $3.95 billion, surpassing the $3.78 billion that analysts had expected.

Lowest Since 2020

The forecast followed more than a year of shrinking sales. Revenue in the first quarter declined 16% to $3.66 billion, marking the lowest level since 2020. Analysts had estimated $3.6 billion. Profit was $1.20 a share, down from $1.85 a year earlier.

Texas Instruments’ stock has been lagging behind a rally by the Philadelphia Stock Exchange Semiconductor Index this year. Investors have poured money into companies such as Nvidia Corp., rewarding them for the surge in orders related to artificial intelligence computing.

Texas Instruments lacks the cachet of Nvidia, but it’s the biggest maker of analog semiconductors and embedded processors. Its products perform simple but vital functions, such as converting power to different voltages within electronics. Though some of its chips are used in the same machinery as Nvidia’s processors, many more of its products perform more prosaic roles in household electronics, factory machinery and vehicles.

Ending Outsourcing

Such chips generally require less advanced production techniques than digital products, but the company has embarked on a plan to revamp its manufacturing facilities. As part that effort, Texas Instruments will all but end outsourcing of production.

While Elliott is best known for taking stakes in some of the world’s biggest companies and pushing for changes, its strategies also span credit, commodities, real estate and private equity. The firm has built a large position in industrial giant Johnson Controls International Plc, whose performance has lagged its peers, Bloomberg News reported this month.

(Updates with company’s response in eighth paragraph.)

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