Activist Elliott takes $2.5 billion stake in Texas Instruments, urges company to improve free cash flow

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 company to improve its free cash 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 would allow the company to achieve free cash 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.

Shares of TI jumped about 3% on the news before paring back the gains in morning trading.

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 always asked to be judged – free cash flow.

Citing the reduction of free cash flow from $6.40 a share in 2022 to an expected $1.83 a share this year, 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 as a result, trailing its peer group by substantial margins over the last two, four, six and 10-year periods.

The 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 year 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 result in the addition of capacity allowing for the company to