Avago Technologies (AVGO, Financial) has been on a stunning run in the last 12 months. The stock has doubled in the last few months, and the goods news doesn’t seem to end for investors. The company reported a stunning quarter last month and also confirmed that it is buying rival Broadcom (BRCM, Financial) in a deal worth $37 billion.
Benefiting from Broadcom deal
Investors were clearly pleased with Avago’s decision to buy Broadcom as shares of both companies have appreciated considerably since the deal was announced. While this deal comes in as a surprise, it will definitely benefit Avago in the long run. The companies recently stated that they are aiming for a 40% long-term operating margin, up from the 30% collectively possessed by the companies today. In addition, gross margin is expected to jump to 60% from 57%, and R&D and SG&A spend respectively fall to 16% and 4% of revenue from 20% and 7%.
Avago’s FBAR filter sales, which have been helped by 4G telephone development, are already expected to propel growth, however the future development drivers for the Wireless end market (41% of AVGO Sales) have been around LTE arrangement and carrier aggregation. Broadcom supplements this development driver as a market pioneer in bearer Ethernet, while additionally picking up share in optical transport and routers.
Avago’s M&A strategy is clear. It needs to acquire organizations that will allow it to expand revenue or fill holes in existing target markets. Broadcom likewise offers one of the broadest and most profound portfolios in wireless network. Broadcom has a reputation of advancement and consistency in its remote integration fragment, permitting Avago to influence Broadcom to proceed make superior separated innovations.
Avago Technologies anticipates over $750 million in yearly synergies. The savings will be primarily driven by cutting the R&D costs of Broadcom and the SG&A expenses of both the combined company. To put into perspective, Broadcom will go from spending 23% of revenue on R&D to only 16%. By comparison, Qualcomm (QCOM, Financial) spends a little over 17% of its revenue of R&D. After the acquisition, the company will nearly cut SG&A spending in half. I think Avago’s decision to buy Broadcom will prove to be beneficial for the companies, making it a great investment.
Conclusion
The semiconductor industry is consolidating fast as companies seek cost synergies rather than product synergies. The Avago-Broadcom deal is definitely a game changer for both the companies, and it has opened up many new gates to fuel growth. They will enjoy multifold benefits from this deal. Avago has a good record with its mergers and acquisitions, and I have no doubt that this will be another successful acquisition. The company’s great M&A strategy ensures that it will be able to deliver strong growth despite a maturing market. Hence, I think investors should buy Avago Technologies at the present levels.
