Amazon buying TI unit likely to draw mixed reviews

Semiconductor analysts will likely love the idea of Amazon.com buying Texas Instruments’  money-losing mobile chip business, as was rumored from a report in an Israeli newspaper over the weekend.

Analysts tasked with covering Amazon  may not feel so giddy, though they’ve kept quiet so far on Monday morning, as the rumor helped drive up TI shares nearly 3% in early U.S. trades, while Amazon slipped by about 1.4%.

The report, from the business newspaper Calcalist, cited an unnamed source as having Amazon in “advanced talks” to buy TI’s mobile chip business in a deal potentially worth “billions of dollars.”

TI first broadcast last month that it was re-thinking its plans for the unit, which makes chips used in smartphones and tablets, and includes the OMAP application processor used in Amazon’s line of Kindle devices.

Such a move may make some sense from the standpoint of vertical integration. Apple , Amazon’s chief rival in the mobile device space, designs its own chips for its iPhone and iPad products, as does Korean electronics giant Samsung. But Amazon operates at thin margins as it is, and taking on an entirely new business unit with high costs may be more than the company’s investors can swallow – especially given Amazon’s already high levels of investment in building out its distribution network as well as its devices – which the company sells at near break-even levels in order to make money on content.

Stacy Rasgon of Bernstein Research told MarketWatch on Monday that he estimates TI’s mobile chip business currently generates about $800 million a year in operating expenses for the company with a revenue base of about $1.1 billion. The business does not include any fabrication facilities, so Amazon would likely be buying design capabilities and intellectual property.

Rasgon, who rates TI as an outperform, said he has been pushing TI to get out of the wireless chip business “for some time,” and said he obviously likes the idea of them getting some money for the business as opposed to shutting it down. “It’s more likely a device maker would buy this than another chip maker,” he said, noting that the most obvious candidates on the chip side – like Intel , Qualcomm , Nvidia  and Broadcom  – already have similar businesses.

Another chip analyst — Cody Acree of Williams Financial — wrote in an early note that “With Amazon widely expected to soon offer its own smartphone, the volume across its phones and tablets could be sufficient to make the purchase financial feasible.” He said a sale would be a “solid positive” for TI shareholders.

Analysts covering Amazon are likely to be less enthusiastic on the prospect, though none could be reached for early comment on Monday. The e-commerce giant reports its third-quarter earnings next Thursday.

– Dan Gallagher