Activist Elliott takes $2.5 billion stake in Texas Instruments | Wilnesh News

Elliott, a $65 billion hedge fund known for its shareholder activism, has offered Texas Instruments It also urged the company to improve its free cash flow by adjusting a less stringent capital expenditure plan.

In a 13-page letter seen by CNBC, Elliott recommended that Texas Instruments introduce a so-called “dynamic capacity management strategy” that would allow the company to achieve $9 per share revenue by 2026. For free cash flow, that’s roughly 40% higher than the current consensus among analysts tracking the world’s largest analog semiconductor maker.

After the news broke, TI’s stock price rose about 3%.

Elliott believes that Texas Instruments (TI)’s strict compliance with the capital expenditure plan implemented in 2022 has significantly reduced free cash flow, the metric that Texas Instruments (TI) has been required to judge, thus weakening shareholder returns.

Citing a decline in free cash flow from $6.40 a share in 2022 to an expected $1.83 a share this year, Elliott maintained that TI alienated investors who might otherwise gravitate toward Texas Instruments’ efforts in analog chips serving automotive and dominant position in the industrial complex. Elliott insists its share price has suffered as a result, lagging its peers significantly over the past two, four, six and 10 years.

Elliott’s letter focuses on the 2022 capital spending plan, which calls for TI to increase its capital spending to a high of $5 billion annually between 2023 and 2026, making it 23% of revenue spent on capital spending in 2020. Approximately 5% of revenue over the past decade.

The capital allocation will result in increased production capacity and nearly double the company’s annual revenue to $30 billion.

The problem, Elliott believes, is that a reversal in TI’s chip demand cycle since the program was implemented will result in production capacity levels “50% higher than consensus revenue expectations in 2026 and 2030.”

The letter was signed by Jesse Cohn, who manages Elliott’s activist efforts, and senior portfolio manager Jason Genrich. Jason Genrich oversees activist efforts Western Digital, sales force and sap Among other things. The two believe the key issue facing TI management and the board of directors is “The question is not whether TI has a well-thought-out long-term strategy, but rather: is the fixed scale and pace of its capacity buildout appropriate given the expected levels of overcapacity?

Elliott suggested that the company either more forcefully communicates why it believes this capacity increase is justified or moves to a more dynamic approach to capital expenditures by building new manufacturing facilities but being more cautious in equipping them so that it can Respond more accurately to market requirements.

The letter’s tone was much less dramatic than Elliott’s usual, making it seem unlikely that the company will challenge management or the board of directors in a more forceful manner anytime soon.

In fact, the only threatening passage appears on page 11, where Elliott accuses the board of failing to hold management accountable to one of the company’s core values; prudent capital discipline, and urges it to adopt more dynamic capacity expansion by adopting ways to re-assume regulatory responsibilities.

A spokesman for Elliott declined to comment on the letter. Representatives from TI could not be reached.