Broadcom To Be Acquired By Avago In Record Tech Deal

Last week, Broadcom (NASDAQ:BRCM) entered into a definitive agreement with Avago Technologies, where the latter will acquire the former in a cash and stock transaction that values the combined company at $77 billion in enterprise value. Under the terms of the definitive agreement, Avago will acquire Broadcom for $17 billion in cash consideration and the economic equivalent of approximately 140 million Avago ordinary shares, valued at $20 billion as of May 27, 2015. This brings the  total consideration for the transaction to $37 billion, a premium of more than 25% over the Broadcom’s market cap before the deal was announced. The transaction is expected to close by the  end of the first calendar quarter of 2016 and is subject to regulatory approvals in various jurisdictions, as well as the approval of Avago’s and Broadcom’s shareholders. Once the  deal is concluded, Broadcom shareholders will own approximately 32% of the combined company. Broadcom’s shares are up almost 15% since the deal was announced on May 28th. (Read Press Release)

Our price estimate of $44 for Broadcom is almost 20% lower than the current market price.

See Our Complete Analysis for Broadcom Here

The Combined Company Will Be The 3rd Largest U.S. Semiconductor Maker By Revenue

Avago Limited is a leading designer, developer and global supplier of a broad range of analog semiconductor devices, with an extensive portfolio in four key markets:  wireless communications, enterprise storage, wired infrastructure, and industrial and other. Broadcom is a global leader and innovator in digital CMOS semiconductor solutions for wired and wireless communications. The company is best known for its connectivity chips, which are used widely in smartphones made by Apple (NASDAQ:AAPL)  and Samsung Electronics (OTC:SSNLF) and wireless connectivity devices.

The combination of Avago and Broadcom will create a global diversified leader in wired and wireless communication semiconductors.  The combined company, to be based in Singapore and known as Broadcom, will be the third-largest U.S. semiconductor supplier, behind Intel (NASDAQ:INTC) and Qualcomm (NASDAQ:QCOM), and the sixth largest in the world according to final annual semiconductor market shares.

The transaction brings together Avago’s offering of analog devices for Wireless and Optical applications and Broadcom’s great strengths in digital Ethernet, cable and Wireless connectivity products. As such there is notably little overlap in their respective product offerings, though they to a degree serve shared markets. There are thus synergies to be had in sales and marketing, as well as operations.

In its press release , Broadcom stated that – “Upon completion of the acquisition, the combined company will have the most diversified communications platform in the semiconductor industry, with combined annual revenues of approximately $15 billion.”

The Semiconductor Industry Is Undergoing A Wave Of Consolidations

Demand for cheaper chips and a surge of new products – from PCs to smartphones to the Internet-of-Things (IoT) – has intensified competition in the semiconductor market, which in turn has put pressure on the chipmakers’ bottom line. As a result, the semiconductor space has seen a number of consolidations recently and is likely to see some more in the near future.

In March 2015, NXP Semiconductors acquired Freescale Semiconductor for $11.8-billion. Avago acquired chipmaker LSI Corp for $6.6 billion last year, and had also bid for Freescale. ((Avago-Broadcom $37 billion deal paves way for more consolidations, The Times Of India, June 1, 2015)) Intel is reportedly in talks to buy Altera, a leading fabless vendor of Field Programmable Gate Arrays (FPGAs). (Read: Why Acquiring Altera Can Be A Good Thing For Intel)

Avago has established a strong track record of successfully integrating companies onto its platform, but the Broadcom deal is by far the largest for the company and perhaps for the industry as well. For years, Avago has followed a strategy of divesting weak units and products and expanding in faster-growing areas mainly through acquisitions.

The merger will help Broadcom and Avago improve their bargaining position with manufacturers. The two companies expect to reap annual cost-saving synergies of at least $750 million within the first 18 months. Since the two product portfolios hardly overlap, these savings are expected to fall mostly in the combined sales and administration structure, as we noted. Avago’s management hopes to bring Broadcom’s lagging profit margin up to Avago’s level. ^[1] Key here, however, is the degree to which Broadcom’s more R&D-intensive offering is supported in the wake of the acquisition.  While Avago’s profit margin is higher than Broadcom, it is below that of Intel and Qualcomm, which enjoy the benefit of large economies of scale and strong, proprietary offerings. Avago and Broadcom hope to follow a similar strategy to trim down their costs.

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1. Why Is Avago Technologies Ltd. Paying $37 Billion For Broadcom Corporation?, The Motley Fool, May 31, 2015 [↩]