Although the wireless and wired communication market is growing rapidly worldwide, when it comes to the production of chip conductors being used in these gadgets, the demand has slowed over the years. This has led to a pattern among chip-making companies to merge in order to consolidate and be among the top ranked players. Joining this bandwagon was Singapore-based but US-listed Avago Technologies Ltd (AVGO, Financial) which is taking over Broadcom (BRCM, Financial) for $37 billion. In a press release on Thursday, Avago announced this merger, the biggest in the semi-conductor industry, as a move to maintain its profitability. Broadcom founders Henry Samueli and Henry Nicholas termed this development as a move to attain their vision of being world leaders.
Consolidation in the semi-conductor market
With this merger between Avago and Broadcom, the two firms can combine their resources and technologies to build on their services as chipmakers for computers and smartphones as well as connected devices such as automobiles and industrial equipment and wireless networks. “Today’s announcement marks the combination of the unparalleled engineering prowess of Broadcom with Avago’s heritage of technology from Hewlett-Packard (HPQ, Financial), AT&T (T, Financial), and LSI Logic, in a landmark transaction for the semiconductor industry,” Hock Tan, CEO of Avago, said in the statement. Bradcom brings to the table chips for complex electronic systems with a heavy customer portfolio including Amazon.com (AMZN, Financial), DirecTV (DTV, Financial) and Dell Computer (DELL, Financial) and supplier of communication chips to Apple (AAPL, Financial) and Samsung (SSNLF, Financial).
This may be the biggest merger of sorts, taking many in the market by surprise since Broadcom generates nearly twice the annual revenue compared to Avago. However, it is not the first merger and acquisition by rivals to increase their market presence and visibility. In March, NXP Semiconductors (NXPI, Financial) signed a $11.8 billion deal to buy its competitor Freescale Semiconductor (FSL, Financial) in order to emerge as market leaders in making chips for in-car and connected gadgets. Last year, German chipmaker Infineon Technologies (IFNNY) bought US group International Rectifier for almost $3 billion. The biggest player in chip industry, Intel Corp (INTL) has reportedly shown an interest in Dutch chipmaker Altera Corp (ALTR).
Avago has been on a major spree of acquisitions and earlier this month, it bought networking products maker Emulex Corp. (ELX) of Costa Mesa for about $606 million.
However, the consolidation plan hasn’t worked out well for some deals. In May, US federal agencies did not ratify a deal between Applied Materials (AMAT) of the US and Tokyo Electron (TOELY) of Japan due to some competition issues.
What’s in store after the merger?
According to the statement, Avago will shell out $17 billion in cash and $20 billion in stock to the shareholders in its deal to buy California-based Broadcom, which will give investors a 32% stake in the merged entity. The deal is expected to be signed by mid-2016, but only after the regulatory review has cleared it. After that, the merged company will be called Broadcom Limited but will be headed by Avago’s top man Tan Samueli and is expected to be part of the board of Directors as well as the Chief Technology Officer, whereas Nicholas will be an advisor to Tan. The new company is estimated to generate $15 billion revenues annually and $77 billion enterprise value. Thursday’s joint statement of the two companies claimed that the “annual cost synergies” of $750 million will be recovered within the next 18 months.
On Wednesday, a day before the official announcement, rumours created excitement in the market as shares of both companies soared. Broadcom's stock jumped by $10.09 or 21.5% to $57.15 a share and Avago's stock saw a spike up by $10.19 or 7.8%, to $141.49 a share.
