Analog Devices, Linear Combine To Form 'Powerhouse,' Says BMO

BMO has raised its price target on Analog Devices, Inc. (NASDAQ: ADI) to $85 from $65 following its $14.8 billion acquisition of Linear Technology Corporation (NASDAQ: LLTC), saying the combined entity will be "another analog powerhouse" after Texas Instruments Incorporated (NASDAQ: TXN).

BMO is positive on the deal and said, "We do not believe ADI could have acquired a better asset to complement its business."

BMO predicts analog to become a $46 billion industry at the end of 2016, with Texas Instruments expected to capture about 18 percent share. The combination of Analog and Linear will result in an 11 percent share.

"We like businesses that are sticky, generate a lot of FCF/have high FCF margins, and with management teams that are pre-disposed to running businesses with shareholders in mind. We have always categorized ADI as the latter," analyst Ambrish Srivastava wrote in a note.

Related Link: Analysts React To Analog Devices' Linear Purchase

Srivastava, who has an Outperform rating on Analog Devices, noted that ADI is buying a business that is "pretty uniquely positioned and with really software-like operating margins."

The analyst said the merger combines two very complementary franchises and the combined entity can generate gross and operating margins north of 70/40 percent. Further, the combined entity will cater to "stickier and more profitable segments" such as industrials, automotive, infrastructure and PC/consumer.

"We also believe the combined business should appeal to investors who have not liked ADI's exposure to Apple Inc. (NASDAQ: AAPL), which is going to be lower as a result of the acquisition," the analyst added.

At time of writing, shares of Analog Devices were relatively flat at $63.89. Based on Friday's close, the target price of $85 implies a potential upside of 36 percent.

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