Avago Technologies Ltd. said it has struck a deal to purchase communications IC vendor Broadcom Corp. for $37 billion in cash and stocks in what looks like one of the biggest deals in the history of the semiconductor market. The transaction once concluded will result in the creation of an industry behemoth with a wider range of semiconductor offerings for the wireless and networking equipment market.
By sales and market valuation, the Avago-Broadcom merger, will lead to the creation of a company with an estimated $15 billion in annual sales and a pre-closing market value of $77 billion, putting it amongst the industry’s biggest enterprises. It is expected to offer customers a range of products for OEM customers in wireless and wired communications, automotive, enterprise storage and industrial applications.
Observers believe a successful conclusion of Avago’s acquisition of Broadcom could trigger other M&A transactions throughout the electronics industry and especially amongst component vendors as companies seek to broaden offerings to OEMs that increasingly demand one-stop procurement and design engineering support services from suppliers.
Several other companies in the semiconductor market have reached similar M&A deals in the last year, merging businesses to improve operating scale, leverage, market reach and financial performance. Recent examples include NXP Semiconductor’s offer to purchase Freescale Semiconductor for $11.3 billion and, on the OEM side, Nokia’s $16.6 billion offer to acquire Alcatel-Lucent.
Company executives said Avago and Broadcom decided to merge operations to improve their financial performance, reduce costs, consolidate R&D and capital expenditure, improve sales and marketing outreaches and deliver a broader range of communications semiconductor products to customers. While both companies are strong in their respective market segments, the competition has also intensified in recent years and revenue growth has similarly become more difficult. By pooling resources and cross-selling products, the combined company can vastly improve its competitiveness, according to executives.
"The combination of Avago and Broadcom creates a global diversified leader in wired and wireless communication semiconductors,” said Hock Tan, president and CEO of Avago, in a statement announcing the transaction. “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."
Under the terms of the transaction Avago will pay a total of $37 billion in both cash and stocks to acquire Broadcom, funding the deal with available cash on both companies’ balance sheet. At the end of its fiscal 2015 second quarter ended May 3, Avago had approximately $2.5 billion in cash and short-term investments while Broadcom reported nearly $3 billion in cash and short-term investments plus $2.5 billion in long-term investments. The companies expect to utilize $8 billion in available cash to fund the deal and tap banking institutions for the cash balance of $9 billion. Avago said it will issue new shares valued at $20 billion for the balance of the $37 billion deal.
The company that emerges from the combination will be named Broadcom Ltd. although existing Broadcom shareholders will own about one-third of the new entity. Tan, the current CEO of Avago, will retain the title at the new enterprise while Henry Nicholas, a former CEO of Broadcom and co-founder of the company, is expected to join the new company in an advisory role. Henry Samueli, another co-founder of Broadcom who currently serves as CTO and chairman of the board of directors, will join the new entity as CTO and board director. Scott McGregor, the president and CEO of Broadcom, is expected to leave the company at the close of the transaction.
A merger would seem to be a viable strategic move by both Broadcom and Avago although the smaller company by sales is buying its larger rival. Broadcom executives want to avoid a situation where the company’s growth stalls due to tough opposition from rivals in the wireless communications market, a sector now marked by increasing reliance on internally developed processors by the biggest industry OEMs. By combining with Avago, Broadcom stands a better chance of improving its competitiveness, according to president and CEO McGregor.
"This transaction benefits all of Broadcom's key stakeholders," McGregor said in the statement referenced above. "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."
Broadcom reported first quarter sales of $2.06 billion, up 3.7 percent, from $1.98 billion in the year-ago quarter. Revenue in 2014 rose to $8.43 billion from $8.31 billion while profits jumped to $652 million from $424 million.
Avago has been very active as a consolidator in the semiconductor market. The company has more than doubled its sales with acquisitions in the last one year although the Broadcom move is its largest to date. Once consolidated into Avago’s financial statement, the Broadcom acquisition is expected to nearly triple the company’s sales to approximately $15 billion and give it one of “most diversified communications platform in the semiconductor industry,” according to executives. In the last fiscal year ended Nov 2, 2014, Avago reported sales of $4.3 billion, up from $2.5 billion in fiscal 2013.
Concurrent with the announcement of the Broadcom deal, Avago also today posted results for the fiscal 2015 second quarter ended May 3, showing revenue rising to $1.6 billion from $701 million in the fiscal 2014 second quarter. Net income for the recent quarter rose to $344 million, or $1.33 per share, from $158 million, or 63 cents per share.
Avago’s latest results included contributions from several recent acquisitions, including the recent purchase of LSI Corp. and PLX Technology Inc. The company did not include the results of Emulex, which it agreed to acquire earlier this month. On a sequential basis, Avago’s revenue slid approximately one percent but the company expects to reverse the trend in the fiscal third quarter, according to CEO Tan.
"We delivered solid second quarter revenue while significantly exceeding gross margin and EPS expectations for the quarter," Tan said. "We expect to resume revenue growth in the third quarter driven by strength in our wireless and enterprise storage segments".