Chip ETFs in Focus on Analog Devices Deal to Buy Maxim

The semiconductor space is heating up with the expected largest U.S. merger so far this year. This is especially true as chipmaker giant Analog Devices ADI plans to acquire rival semiconductor Maxim Integrated Products MXIM for $21 billion in an all-stock deal. The enterprise value of the transaction is $68 billion.

Deal in Focus

Under the terms of the deal, Maxim shareholders will receive 63 cents of ADI common stock for each share owned at the closing of the transaction. ADI shareholders will own 69% of the new entity, while Maxim shareholders own the remaining 31%. The transaction, already approved by both company's boards, is intended to qualify as a tax-free reorganization for U.S. federal income tax purposes. It would likely require approval from regulators in the United States, China and the European Union.

The deal, which is expected to close in the summer of 2021, would create a competitor to Texas Instruments TXN, the leader in analog semiconductors with a $119 billion market value. It is aimed at boosting its market share in automotive and 5G chipmaking (read: What's in Store for Dow ETF Going Into Q2 Earnings).

The combined entity is expected to have revenues of $8.2 billion and free cash flow of $2.7 billion on a pro-forma basis. The combined company will have more than 50,000 products and over 10,000 engineers, serving more than 125,000 customers, with an addressable market of $60 billion.

The transaction is expected to be accretive to adjusted earnings per share in 18 months subsequent to closing with $275 million of cost synergies by the end of year two.

Increase in Guidance

Analog Devices raised July quarter revenues to $1.45 billion from the previous guidance of $1.32 billion, reflecting strength in communications and industrial end markets. The company also increased adjusted earnings per share to $1.33 from $1.08. Meanwhile, Maxim expects revenues of about $545 million for its fiscal fourth quarter, above the company’s previous guidance range of $480-$540 million (read: Nvidia Tops Intel by Market Cap: ETFs to Buy).

Market Impact

Following the merger announcement, shares of Maxim gained 8.1% at the close, crushing its average volume, as nearly 24 million shares moved hands compared with 2.6 million on average. Meanwhile, shares of ADI dropped 5.8%.

The news has put the spotlight on some semiconductor ETFs, which could be the best ways for investors to tap the opportunity arising from the ADI-MXIM deal. Investors should keep a close eye on the movement of these ETFs over the coming weeks.

iShares PHLX Semiconductor ETF SOXX

This ETF follows the PHLX SOX Semiconductor Sector Index and offers exposure to 30 firms with Analog Devices and Maxim accounting for 3.9% and 2.1%, respectively. It has amassed $3.2 billion in its asset base and trades in a solid average volume of more than 1 million shares a day. The fund charges 46 bps in fees a year from investors and has a Zacks ETF Rank #1 (Strong Buy) with a High risk outlook.

VanEck Vectors Semiconductor ETF SMH

This fund provides exposure to 25 securities by tracking the MVIS US Listed Semiconductor 25 Index. Analog Devices and Maxim make up for 4.4% and 1.7% of assets, respectively. The product has managed assets worth $2.4 billion and charges 35 bps in annual fees and expenses. It is heavily traded with a volume of more than 5 million shares per day and has Zacks ETF Rank #2 (Buy) with a High risk outlook (read: Chip ETF Posts Best Q2: 5 Stocks That Led the Way).

SPDR S&P Semiconductor ETF XSD

This fund tracks the S&P Semiconductor Select Industry Index, holding 36 stocks in its portfolio. Out of these, Analog Devices and Maxim accounts for 3% share each. The ETF has AUM of $514.1 million and an average daily volume of about 109,000 shares. It charges 35 bps in fees per year and has a Zacks ETF Rank #1 with a High risk outlook.

First Trust Nasdaq Semiconductor ETF FTXL

This fund offers exposure to the most-liquid U.S. semiconductor securities based on volatility, value and growth by tracking the Nasdaq US Smart Semiconductor Index. Holding 31 stocks in its basket, it has diverse exposure across components with Maxim making up for 4.03% share and Analog Devices accounting for 1.4% of assets. FTXL has accumulated $43.4 million in AUM while average trading volume is light at around 16,000 shares. It charges 0.60% in expense ratio and has a Zacks ETF Rank #2.

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Maxim Integrated Products, Inc. (MXIM) : Free Stock Analysis Report
 
Analog Devices, Inc. (ADI) : Free Stock Analysis Report
 
Texas Instruments Incorporated (TXN) : Free Stock Analysis Report
 
iShares PHLX Semiconductor ETF (SOXX): ETF Research Reports
 
VanEck Vectors Semiconductor ETF (SMH): ETF Research Reports
 
SPDR SP Semiconductor ETF (XSD): ETF Research Reports
 
First Trust NASDAQ Semiconductor ETF (FTXL): ETF Research Reports
 
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