Avago-Broadcom $37 billion deal could put pressure on Qualcomm

29 May 2015 | Author: | No comments yet »

Avago Dives Deep With Broadcom.

Long before Snapchat or Silicon Beach were ideas, chip maker Broadcom Corp. grew from its roots in a Santa Monica condominium into a 10,000-worker powerhouse in Irvine that helped turn Orange County into a technology hub.

On Thursday, Avago Technologies and Broadcom — two semiconductor manufacturers — announced the largest technology deal to date, a $37 billion merger.An accelerating wave of consolidation in the semiconductor industry has a new point man: Hock Tan, a press-shy numbers guy now mounting the largest takeover in high-tech history. There was a mantra on Wall Street after the air was sucked from the merger market in 2008: Deals would return as soon as chief executives regained confidence.

That was Avago’s largest deal by far at the time, and meant the company had to take on significant leverage, given that the purchase price was more than six times Avago’s cash on hand. It also would continue the CEO’s practice of using debt to finance takeovers of bigger name firms with larger workforces, shedding nonessential operations and staff and taking other steps to boost profit margins.

From packaged food to drugs, cement, retail, cigarettes and oil, companies in almost every major industry are attempting record or near-record takeovers. In a $37-billion deal, one of the largest in the tech industry, Broadcom agreed to be bought by Avago Technologies Ltd., a Singapore chip maker run out of San Jose.

HPQ -0.38 % , makes chips for scores of products including smartphones, computer disk drives, consumer appliances, data networks, telecommunications, and industrial gear. They join recent merger partners in the record books: cable-TV providers Time Warner Cable and Charter Communications ($79 billion), cement makers Holcim and Lafarge ($38 billion), and oil producers Royal Dutch Shell and BG Group ($79 billion — all figures include net debt). “It’s more confidence,” Rich Jeanneret, Americas vice chairman of transaction advisory services at EY, said earlier this month. “People are just feeling good and seeing that M&A is being rewarded. And the debt load the company took on to do the deal has proved manageable; Avago succeeded in bringing its current ratio of debt to earnings before interest, taxes, depreciation and amortization to 1.8 times now from 3.8 times when it bought LSI. With the merger, the Broadcom stock held by Samueli and Nicholas would be worth nearly $1.3 billion and $1.4 billion, respectively, according to Broadcom’s most recent proxy statement. “The question is not why now, but why not a couple of years ago,” he said. “Our objective has always been to be the dominant player in the marketplace.

It’s been a broad M&A recovery.” The U.S. economy is expanding again, leading the way for the world’s recovery and giving corporate executives reason to be optimistic. We are in striking distance of that now.” “When Henry Nicholas and I founded Broadcom, we had a vision of creating the world leader in communications semiconductors,” said Samueli, Broadcom’s chairman and chief technical officer. “Today’s announcement is a continuation of that vision, and we could not think of a better partner for the future than Avago.” The addition of Broadcom, whose chips are embedded in smartphones, cable set-top boxes, broadband systems and myriad other computing products, enables Avago to become more of a one-stop shopping site for chip customers. “The industry is changing,” Broadcom Chief Executive Scott McGregor told analysts Thursday. “To deliver success for both our customers and shareholders, significant size and scale are becoming increasingly important.” Broadcom, with $8.4 billion in sales last year, began operations in 1991 and went on a buying spree that decade to bolster its growth. Both companies have benefited greatly from their exposure to mobile devices such as smartphones, but neither is completely dependent on that cyclical business. The combined company would be called Broadcom Ltd. “This is a landmark day in the history of the industry,” said Scott McGregor, Broadcom’s 58-year-old chief executive, during a conference call on Thursday. Avago, which is based in Singapore to take advantage of a lower corporate tax rate, specializes in chips for wireless communications, corporate data storage and industrial products.

They’re also consolidating similar businesses while parting with ones that are no longer a good fit, because investors favor more narrowly focused companies. The company’s shares closed on Thursday at $56.25, above Avago’s $54.50 per share cash offer, a sign some investors feel a higher offer may emerge. Indeed, in announcing the merger, Nicholas said in a statement that Avago has “a fast-paced, no-nonsense, process-driven business culture that we need to take our combined company to the next level.” Avago needed consent from Nicholas, who stepped down as chief executive in 2003, and Samueli to get its merger approved because the co-founders still hold stock with 47% voting power at Broadcom.

INTC 0.89 % also discussed buyout possibilities with Broadcom, though Avago’s interest appeared more serious, a person familiar with the situation said. The companies did not detail any job cuts, but they did project cost savings of $750 million in the 18 months after the deal closes, which is expected early next year. That savings figure is expected to rise in light of Avago’s track record of cutting jobs in the wake of past deals, Wedbush Securities Inc. analyst Betsy Van Hees said.

Nicholas was a former electrical engineering student of Samueli’s at UCLA when they started Broadcom, which is now the 15th largest publicly held company in Southern California, according to FactSet Research Systems Inc. The company prospered in good part by providing chips that enabled people to better tap into and exploit the Internet, and “their claim was quality and high speed,” said Sergis Mushell, a research director at industry research firm Gartner Inc. Other tech firms, including computer hard-drive maker Western Digital Corp., called Orange County home when Broadcom arrived in 1995, but it was Broadcom’s explosive growth that played a major role in boosting the county’s tech scene, Mushell said. “Their appearance in that area boosted up the talent,” he said. “It gave birth to a lot of new companies around it because of the talent pool.” The company also invested in education, both at UCLA and UC Irvine, providing internships and jobs to students, said G.P.

Despite Broadcom’s past success, the company can’t avoid a slowdown in the chip-making industry that’s already spawned several other mergers, analysts said. Including the Broadcom-Avago deal, there have been $64.8 billion worth of semiconductor mergers announced so far this year, according to Dealogic, which tracks the industry.

Tan’s hallmarks is to rein in spending on speculative projects, colleagues say, focusing on chips with established customers and favorable profit margins. T -0.43 % “He has a unique ability to run a big business as if it were a small business,” said Kenneth Hao, an Avago director and managing partner at Silver Lake, the chip maker’s second-largest investor. Tan, a native of Penang, Malaysia, received a master’s degree in mechanical engineering from the Massachusetts Institute of Technology and a master’s degree in business administration from Harvard University. PEP 0.71 % before taking his first technology-related job at Commodore International Ltd., an early PC maker based in Pennsylvania, where he served as vice president of finance. Broadcom investors could choose to receive $54.50 a share in cash or about 0.44 shares in a newly formed Singapore holding company, among other options.

Shares of Broadcom declined 1.6% on Thursday, after surging 21% on Wednesday when The Wall Street Journal reported the companies were in advanced merger talks.

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