A Texas Instruments sign up Dallas, June 14, 2023.
Katie Tarasov
Elliott, the $65 billion hedge fund best known for its shareholder activism, has made a $2.5 billion investment in Texas Instruments and is urging the corporate to enhance its free money flow by adopting a less rigid plan for capital expenditures.
In a 13-page letter viewed by CNBC, Elliott proposes that Texas Instruments introduce what it calls a “dynamic capacity-management strategy” that might allow the corporate to realize free money flow of as much as $9 a share by 2026, which is roughly 40% above current consensus of the analysts who follow the world’s largest maker of analog semiconductors.
Texas Instruments in an emailed statement said it has received the letter and is reviewing it. “As at all times, our focus is on continuing to make decisions which can be in the very best interest of TI and all of our shareholders,” the corporate said.
Elliott believes Texas Instrument’s rigid adherence to a capital expenditure plan put in place in 2022 has eviscerated shareholder returns by greatly reducing a metric by which TI has at all times asked to be judged – free money flow.
Citing the reduction of free money flow from $6.40 a share in 2022 to an expected $1.83 a share this yr, Elliott maintains that TI has alienated investors who might otherwise gravitate toward its dominant position in serving the automotive and industrial complexes with analog chips. Its stock price, Elliott insists, has suffered because of this, trailing its peer group by substantial margins over the past two, 4, six and 10-year periods.
The main focus of Elliott’s letter is the 2022 capital expenditure plan, which called for TI to ramp its capex spending to a high of $5 billion a yr from 2023-26, bringing that spending to as much as 23% of revenues from what had been capex spending of roughly 5% of revenues over the preceding decade.
That allocation of capital will end in the addition of capability allowing for the corporate to almost double current annual revenues to $30 billion.
The issue, Elliott maintains, is that a reversal within the cycle of demand for TI’s chips because the plan was put in place will end in capability levels which can be “50% above consensus revenue expectations in 2026 and 2030.”
The letter’s signatories are Jesse Cohn, who runs activism at Elliott and senior portfolio manager Jason Genrich, who has overseen activism efforts in Western Digital, Salesforce and SAP, amongst others. The duo believes the important thing query for TI’s management and board is “not whether TI has a thoughtful long-term strategy but slightly: Is the fixed magnitude and pace of its capability buildout appropriate given the expected level of excess capability?”
Elliott suggests the corporate either communicate more forcefully why it believes such a rise in capability is justified or move to a more dynamic approach to capex by which it builds recent fabrication facilities but is more deliberate about equipping them, allowing for a more precise response to market demand.
The letter maintains a far less adversarial tone than is commonly the case for Elliott, making it seem unlikely that the firm will challenge management or the board more forcefully within the near term.
The truth is, the one threatening passage comes on page 11 by which Elliott charges the board with failing to carry management accountable to considered one of the corporate’s core values: prudent capital discipline. In that passage, Elliott urges it to recapture its oversight responsibility by instituting a more dynamic approach to capability expansion.
A spokesperson for Elliott declined to comment on the letter.
