SAN JOSE, Calif. – If Avago bids to buy Broadcom as reported it would be the largest of an escalating set of deals for the company and the consolidating semiconductor industry. The combination would have little product overlap, a few areas of synergy and would no doubt squeeze out plenty of savings in layoffs and spin-outs.
Ironically, Avago is the smaller of the two companies at about $4.3 billion in revenues in its last fiscal year, making it the 14th largest semiconductor company in the rankings of IC Insights. By comparison, Broadcom reported $8.4 billion in revenue in its last fiscal year and is ranked the ninth largest chip company.
A combined company would have nearly $13 billion in revenues, edging it up to about seventh place, ahead of Texas Instruments and below Qualcomm at $19 billion. Avago has its quarterly call with financial analysts later today at which point it will likely confirm or quash the reports.
Avago and Broadcom have little overlap although both have products that target broad consumer and commercial markets. Avago is strong in analog products related to optical and wireless communications; Broadcom is more focused on digital SoCs for smart home and data center markets.
The two no doubt have plenty of overlap in their lists of customers, an advantage for chip buyers seeking to trim down their lists of vendors. Both companies are tightly managed with histories of steadily growing revenues and consistent profits.
Avago’s base in Singapore may explain why the smaller company would act as the buyer. It sports a net tax rate of less than 10% thanks to its Asian base, a net benefit to Broadcom which focuses mainly on price-sensitive mainstream markets.
Avago is well known as an acquisitive company with cash on hand. It bought LSI Inc. in 2013 for $6.6 billion, one of the largest chip mergers at the time. Last year it snapped up PLX Technology for about $300 million and earlier this month completed a deal to buy Emulex for about $600 million.
With the last three deals, Avago built out its business focused on big data centers, a red-hot market given the rise of Web services and cloud computing. Broadcom further extends that business with its big Ethernet switches and network processors, but also adds a significant mobile consumer component in chips for Wi-Fi routers and smartphones.
“Looking over Avago's product line, I don't see any conflict from Broadcom's offerings; in fact, there are several Avago product lines that would be enhanced with Broadcom's products,” said Will Strauss, principal of market watcher Forward Concepts (Tempe, Ariz.). “For example, Avago is big on RF and fiber optics, but very weak on baseband technology (that Broadcom has) that would go well for C-RAN product offerings where remote radio heads connect to fiber [networks and the cloud],” he said.
“In short, Broadcom would bring an expanded product offering to Avago, with very little, if any, redundancy,” Strauss added.
Veteran semiconductor analyst Handel Jones agreed. "The leadership Ethernet technology of Broadcom is highly synergistic with the serdes of Avago and the Wi-Fi combo products of Broadcom also are synergistic with RF activities of Avago," Jones said, noting his earlier observation that Intel should buy Broadcom rather than Altera as rumored.
Broadcom stock price shot up from $47 to $57 after reports of the talks. Avago’s stock rose from $132 to nearly $145 after stories of merger talks hit.
The deal would leapfrog the largest semiconductor merger proposed in recent years, the combination of NXP and Freescale that would create a $10+ billion diversified chip designer. It also far surpasses the $4 billion bid Cypress made for Spansion in December.
Financial analysts said they continue to expect consolidation in the slowing chip market. However, most of the deals will be smaller ones for second-tier companies merging to survive in what is increasingly becoming a land of giants.
If a deal goes ahead, Avago would likely shop around parts of Broadcom to make the most of acquisition, acting like a private equity firm. It sold parts of LSI’s flash business to Seagate and parts of its networking business to Intel.
"It is likely they will keep the networking and communications products from Broadcom and look to divest the consumer multimedia products," said Jim McGregor, principal of market watcher Tirias Research. "Unlike the frantic pace of consolidation we are seeing around embedded/IoT products, the networking and communications segment has been in a constant state of consolidation for years," he said.
McGregor's colleague, analyst Kevin Krewell, agreed. "Avago has been on an aggressive acquisition strategy -- reminds me of Broadcom in the 90's -- and it seems the more aggressive they get, the market is rewarding them with higher stock prices," Krewell said.
— Rick Merritt, Silicon Valley Bureau Chief, EE Times