In the world of venture capital it seems there's an Uber for everything being pitched as the next sure bet in Silicon Valley. But when it comes to value-oriented stock investors, many are looking for the
With pharma deals getting heady as a Gold Rush for U.S. targets among Irish, Dutch and Israeli-domiciled drugmakers runs its course, something Valeant CEO Michael Peason alluded to earlier in May, investors on the lookout for a new trade to pile into should consider Singapore-based
On Thursday morning, Avago announced the biggest merger in semiconductor history, a $37 billion cash and stock takeover of
Analysts see a strong strategic fit between Broadcom's broadband, infrastructure and networking businesses and Avago's handset business, and perhaps there will be room to divest some acquired units like Broadcom's connectivity division. Some question the price Avago paid and the amount of stock it is doling out to Broadcom. Avago will pay $17 billion in cash to Broadcom shareholders, financed with cash on hand and $9 billion in debt, to go with $20 billion in stock. Current Broadcom investors will own 32% of the combined company.
But subtly, Avago's deal for Broadcom has many of the trappings of the M&A wave in the pharmaceutical sector.
Singapore-based Avago is buying an Irvine, Calif.-based target in Broadcom, a move that will free up billions in cash that once was trapped overseas. As of 2014, Broadcom had $3.13 billion of cash and cash equivalents held by its foreign subsidiaries, and it deferred about $4.85 billion in tax on un-repatriated foreign earnings, according to SEC filings. Selling to a Singapore-based firm will free the foreign cash and help eliminate potential U.S. tax liabilities.
"This deal should afford the parties with all of the traditional benefits of an inversion, including tax-free access to Broadcom's foreign cash and the ability to reduce the tax rate through earnings stripping," Robert Willens, an independent tax expert told Forbes by email.
The inversions Willens is referring to are the spate of deals where U.S. firms acquired European domiciled entities for the purpose of 'inverting' their corporate structure into lower tax jurisdictions, thus minimizing their overall tax rates and freeing cash from un-repatriated earnings trapped offshore.
Inversions have been particularly popular in the pharma industry, where firms like
Thursday's deal isn't impacted by the Treasury guidelines, says Willens, because Broadcom shareholders will own less than 60% of the stock of the acquiring corporation. It's also not by definition an inversion since Avago is the acquirer, but the result the same. "Here all of the "normal" benefits of an inversion should be freely available," Willens concludes.
The question for investors to puzzle over is what's next?
Is Avago, which acquired LSI Corporation for $6.6 billion just 18-months ago, simply looking to round out its offerings and areas of specialty? Or is it in the process of becoming a consolidator with clear advantages over U.S. chipmakers? After all, Avago beat synergy targets in its LSI acquisition and it foresees $750 million in annual run rate synergies from the Broadcom purchase.
If Avago does intend to be a consolidator, it may already have competition.
Netherlands based mobile chip maker NXP Semiconductor recently announced a $11.8 billion cash and stock deal to buy Bermuda-based
Once both pending deals are completed, there appears to be an ability for the two companies to continue hunting new deals.
Semiconductors with cash trapped offshore such Qualcomm, Texas Instruments, Micron, Analog Devises, Sandisk,
For a semiconductor industry in flux - Intel's recently changed its top management and Qualcomm is facing pressure from activist investor Jana Partners - consolidators like Avago and NXP could also prove a new threat. Intel reportedly was in talks to buy Altera, however, that deal appears to be on ice, according to media reports. Perhaps, this deal will force the likes of Intel and Qualcomm to respond.
