Redefining the dynamics of the semiconductor industry, leading analog semiconductor manufacturer Avago Technologies Limited AVGO is reportedly in the advanced stages of negotiation to acquire rival Broadcom Corp. BRCM. Speculations are rife that the deal could be announced as early as today, when Avago is due to report its second-quarter fiscal 2015 results after the closing bell.
The deal, valued at over $30 billion, is arguably the largest of its kind in the semiconductor chip industry. The transaction also marks the latest round of consolidation in the $300 billion worth industry as the battle for survival gets murkier with intense price wars due to high costs of production and surging R&D expenses for innovative designs. These include the probable acquisition of Altera Corp. ALTR by industry behemoth Intel Corporation INTC, and the purchase of Freescale Semiconductor, Ltd. FSL by Dutch chip maker NXP Semiconductors NV NXPI.
Acquisitions, over time, have been Avago’s most favored mode for penetrating unexplored markets. The wireless chip manufacturer has continuously scoured for potential targets as it sought to venture into uncharted territories. Its revenues have more than doubled following its acquisition of two major industry players, LSI Corp. and PLX Technology last year. While LSI, its biggest deal to date, helped Avago expand into the fast-growing storage chip market, the PLX acquisition enabled Avago to fortify its presence in the enterprise and data center arena.
Early this month, Avago also completed the acquisition of Emulex Corporation in order to expand its enterprise storage portfolio. Avago’s ability to successfully integrate these companies has driven earnings accretion, and continues to boost overall growth.
However, industry experts were quite surprised by the recent takeover target as Broadcom is much bigger in size than Avago, with revenues of $8.4 billion in 2014 compared with its $4.9 billion. Nevertheless, the news was embraced with much fanfare as Broadcom shares gained 21.5% to close at $57.15 on May 27 – its biggest one-day gain and highest value since 2001, while Avago shares were up 7.8% to $141.49.
Much of this heightened anticipation could have been due to the fact that Avago is historically known for its stringent cost cuts and diligent execution of operations. Industry experts believe that with a successful takeover, Avago can make Broadcom a leaner and fitter organization and boost its bottom line by trimming operational costs. On the other hand, Avago’s penchant for traversing new geographical barriers, with blue-chip companies as avid customers and technological products that are in high demand, also serve it in good purpose.
Broadcom provides a portfolio of system-on-a-chip (SoC) and software solutions to manufacturers of computing and networking equipment, digital entertainment and broadband access products, and mobile devices. The SoC solutions inexpensively integrate analog, digital, and mixed signal circuitries that address the requirements of a broad clientele. The company is reportedly the largest supplier of Wi-Fi chips in smartphones and tablets. Brodacom’s chips are also extensively used in modems by cable and telecom firms to deliver broadband Internet access.
In contrast, Avago is a leading diversified global supplier of analog semiconductors targeting the wireless communications, wired infrastructure and industrial/auto markets. Although there is little product overlap between the two companies, Avago’s interest in Broadcom signifies that it is now venturing into a business category. The semiconductor chip industry is also witnessing sluggish growth despite healthy strides in the digital and telecommunications markets. Consequently, synergistic benefits from the merger is likely to increase profitability through economies of scale and mutual sharing of manufacturing expertise, research and development costs and adjustment of staffing expenses.
The merger is likely to lead to further industry consolidation with pricing becoming more rational. Meanwhile, the world is waiting with bated breath for the likely union of this Zacks Rank #2 (Buy) semiconductor manufacturer with the Zacks Rank #1 (Strong Buy) chipmaker.
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