(By Mani) Amazon.com, Inc. (NASDAQ: AMZN) may not be interested in
acquiring the mobile chip business of Texas Instruments Inc. (NASDAQ: TXN) as it
doesn't fit with its current business model.
Israeli financial newspaper Calcalist reported that Amazon in
advanced talks to buy the mobile chip business of Texas Instruments in a deal
valued probably worth in the range of "billions of dollars."
Texas Instruments' smart multicore OMAP processors provide a
scalable, high-performance ultralow power platform from smartphones to tablets,
and e-readers to enterprise and industrial applications.
The perceived benefits to Amazon would be to vertically integrate
applications processors into mobile devices, thus realizing cost savings with
customized solutions. Amazon currently uses Texas Instruments's OMAP 4
processor in its Kindle Fire and Kindle Fire HD.
"In our view, the sale of the OMAP business could be difficult
given flexible resource allocation presently used to support three on-going
OMAP projects," RBC Capital Markets analyst Doug Freedman wrote in a note to
The potential acquisition would put Amazon in direct competition
with Apple, Inc. (NASDAQ: AMZN) and Samsung as they make their own chips and it
would also lock horns with the market leader Qualcomm, Inc. (NASDAQ: QCOM).
However, Texas Instruments, or TI, does not have an
architectural license to customize the chipset design to the likes of Apple,
Samsung Qualcomm and Nvidia, Inc. (NASDAQ: NVDA). TI simply licenses the ARM
If Amazon wants to have its own chipset, then the easier and
cheaper alternative would be getting an ARM architecture license and hire an
application processing team.
Above all, Amazon is an online retailer that is predominately
generating revenues from selling its content such as books and music. Amazon is
developing hardware only to popularize its services, and it is evident from the
admission of CEO Jeff Bezos that it is not selling Kindle devices at a profit.
Consequently, Amazon wouldn't be interested in shelling out
billions buying an application processing business that doesn't fit with its
business model. Moreover, Amazon or any buyer is not likely to see any free
cash flow or savings as the OMAP business is unprofitable with the present
investment level which lists approximately 10 customers.
"Any purchase by a customer would wind down competitor revenues
with limited OpEx savings - if product roadmap investment continued. We believe
a best case valuation given the lack of profitability could be closer to 1x
annual sales or ~$900M, or 3x wind down cash flow," Freedman said.
On the other hand, Texas Instruments has stated they do not want
to sell the embedded design team that accounts for about one-third of present
RD spending, making selling off a design team for tablet and smartphone more difficult.
Last month, the company said they would wind down their
operations in smartphone and tablet oriented OMAP chips and instead focus on
embedded platforms, thereby putting a question mark on the latest OMAP5 chips.
The OMAP 5 platform includes applications processors with
supporting wireless connectivity, power management, battery management and
audio management devices for next-generation smartphones, tablets, and other
Meanwhile, Texas Instruments is likely to seek a better return
than wind down metrics. The business in total is $900 million a year at
approximately 40 percent gross margin.
"With no OPEX and a one year wind down we arrive at ~$300M free
cash flow. This calculation is similar to Nokia baseband exit, except the wind
down duration is shorter," the analyst said.
Texas Instruments' core products in the Wireless sector are
being impacted by softer broader smartphone market sales and lack of
high-volume design wins in the tablet market.
"For the buyer, how do you assure you get the right team members
to make a complete solution? We believe any buyer would have to continue to
invest in the engineering team to round out resources - support of tablets
would need new products every year with 3 ongoing development teams - similar
to TXN present investment level," Freedman noted.