Avago Technologies Acquisition of Broadcom: Let The Chips Fall Where They May

By Peter Bernstein May 28, 2015

As pointed out on several occasions, it was clear at the start of 2015 that this was going to be a year of major restructuring in every part of the global ICT industries. And, as witnessed in just the past few weeks with the pending Nokia acquisition of Alcatel-Lucent and Charter Communications acquisition of Time-Warner, the predictions of massive M&A activities in many ways have more than lived up to expectations.  Indeed, the announcement of Avago Technologies’ intent to buy rival communications chip maker Broadcom for an estimated $37 billion ($17 Billion in case and $20 in shares) should come as no real surprise. Everyone in ICT is scrambling to gain heft as well as filling in missing puzzle pieces in their go-to-market visions in order to compete aggressively and profitably.

via Shutterstock

Chips of the old block

While the market for the computer chips that are the foundation of any and everything that communicates is exploding—smartphones, tablets, routers, data center switches, etc. —competitive realities are that it is very difficult to make a buck if you are not one of the top tier players.  What is interesting is that even with a valuation of $35 Billion, Broadcom has struggled to grow share and profits because of the market power of sector giants Intel and Qualcomm. It has found in Avago Technologies, which originally was part of the semiconductor business of HP that became Agilent Technologies and has since gone through several iterations and corporate transformations to become a public company with a focus on wireless communications and data center storage devices, a chip vendor looking to grow through acquisition and with a product line that is a nice fit for portfolio expansion.

With a combined valuation of roughly $77 Billion and revenues of $15 Billion once the transaction closes the new Avago will have the human and technical resources to compete on with other chip vendors across a broad swath of the ICT industry

The reactions for the two parties were what could be expected.

"Today's announcement marks the combination of the unparalleled engineering prowess of Broadcom with Avago's heritage of technology from HP, AT&T, and LSI Logic, in a landmark transaction for the semiconductor industry," said Hock Tan, President and Chief Executive Officer of Avago. "The combination of Avago and Broadcom creates a global diversified leader in wired and wireless communication semiconductors. Avago has established a strong track record of successfully integrating companies onto its platform. Together with Broadcom, we intend to bring the combined company to a level of profitability consistent with Avago's long-term target model."

"This transaction benefits all of Broadcom's key stakeholders," remarked Scott McGregor, President and Chief Executive Officer of Broadcom. "Our customers will gain access to a greater breadth of technology and product capability. For our shareholders, the transaction provides both compelling up-front value as well as the opportunity to participate in the future upside of the combined business."

It should be noted that thus far Avago and Broadcom investors seem neutral on the deal. After an initial burst of enthusiasm when the rumor first surfaced and was confirmed both stock thanks in large part to a down turn in stocks are trending lower. 

What will be interesting to watch in the next few days is whether this turns out to be the only suitor of Broadcom.  The fit between the two companies does seem to make sense, but whether the valuation is enough to ward off what could be several other interested players is problematic. 

As the musical chairs game in ICT continues, it is important to observe that we are nearing only the first half of 2015 and the M&A activity has been frenetic.  Don’t look for it calm down any time soon including the current speculation surrounding what Ericsson may or may not do to keep pace with Huawei and what will become the new Nokia. 

I always caution that I am not a financial analyst and that anything I write should not be considered in any way shape or form offering such advice.  In fact, the only advice I can give is to pick your favorite stocks and companies and set up an alert on them. You never know who will be next or which companies will have a chair when the music stops. 

Edited by Stefania Viscusi
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