Elliott, the $65 billion hedge fund best known for shareholder activism, Texas Instruments They also urge the company to improve free cash flow by adopting a more flexible capital spending plan.
In a 13-page letter reviewed by CNBC, Elliott proposed that Texas Instruments implement a “dynamic capacity management strategy” that would enable the company to achieve free cash flow of up to $9 per share by 2026, about 40% above the current consensus among analysts tracking the world’s largest analog semiconductor makers.
TI shares rose about 3% on the news but gave back the gains in morning trading.
Elliott believes that Texas Instruments’ strict adherence to its 2022 capital spending plan has significantly reduced the company’s free cash flow, which it has always measured, to the detriment of shareholder returns.
Citing free cash flow of $6.40 per share in 2022 compared with an expected $1.83 per share this year, Elliott argues that TI is alienating investors who would otherwise be attracted to the company’s dominant position as a supplier of analog chips to the automotive and industrial conglomerates. As a result, the company’s stock price has fallen and has significantly lagged its peers over the past two, four, six and 10 years, Elliott argues.
The focus of Elliott’s letter is TI’s 2022 capital spending plan, which calls for the company to raise capital spending to $5 billion per year from 2023 through 2026, increasing capital spending to as much as 23% of sales from about 5% of sales over the past decade.
The capital allocation will add capacity and nearly double the company’s annual revenue to $30 billion.
The problem, Elliott argues, is that the demand cycle for TI’s chips has reversed since the plan was implemented, resulting in production capacity levels “50% above consensus revenue expectations for 2026 and 2030.”
The letter was signed by Jesse Cohn, who heads activism at Elliott, and Jason Genrich, a senior portfolio manager who has been overseeing the activism effort. Western Digital, Salesforce and Financial Statements The two men said the key issues for TI’s management and board of directors were “The question is not whether TI has a thoughtful long-term strategy, but whether the fixed scale and pace of capacity additions are appropriate given the projected levels of overcapacity.”
Elliott suggests the company either communicate more forcefully why it believes this capacity expansion is justified, or move to a more dynamic approach to capital spending, building new manufacturing facilities but equipping them more carefully and responding more precisely to market demand.
The letter was not as hostile as Elliott’s typical tone and makes it seem unlikely that the company will take a more forceful stance in challenging management and the board in the near future.
In fact, the only threatening passage is on page 11, where Elliott criticizes the board for not holding management accountable to prudent capital discipline, one of the company’s core values, and urges it to regain oversight responsibility by implementing a more dynamic approach to capacity expansion.
An Elliott spokesman declined to comment on the letter, and a representative for TI could not be reached.
Author
"Elevate Your Brand with an Exclusive Feature Interview!"
