Avago buys Raspberry Pi chipmaker Broadcom in landmark $37bn deal

29 May 2015 | Author: | No comments yet »

Avago buys Raspberry Pi chipmaker Broadcom in landmark $37bn deal.

Avago said that the purchase will comprise $17bn in cash and an additional $20bn in shares. Avago Technologies Ltd’s US$37bil (RM135.56bil) deal to buy chipmaker Broadcom Corp creates new competitive challenges for Qualcomm and may force the world’s largest mobile chip maker to radically rethink its own strategy.

The purchase of Irvine’s Broadcom Corp. by Singapore-based Avago Technologies is the largest acquisition of a technology company on record and will create a sprawling global company with the most diversified platform in the semiconductor industry.Avago Technologies Ltd agreed to buy Broadcom Corp for US$37bil (RM135.5bil) in the largest merger of chipmakers ever, turning a lesser known company run by a ferocious dealmaker into one of the biggest industry players.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. Qualcomm Inc, which has dominated the market for connectivity chips on smartphones, has been looking to extend its reach into data centres and network infrastructure, but may find its way blocked by an enlarged competitor combining Avago’s strength in storage and Broadcom’s power in networking. “Qualcomm has aspirations of moving into Intel’s data centre processor incumbency that the Avago storage and now enterprise networking (from Broadcom) capability directly overlays,” said Drexel Hamilton analyst Richard Whittington.

Although many details of the $37 billion deal have yet to be revealed, it likely means that Orange County will say goodbye to the headquarters of its largest public company. Broadcom is best known as the employer of Raspberry Pi founder Eben Upton and the manufacturer of the ARM-based chips that power the credit card-size PC.

Wall Street analysts generally cheered the deal, despite some fretting about price, saying Broadcom’s strength in wireless networking, WiFi and Bluetooth chips is a good complement to Avago’s presence in industrial and wired devices. The deal is the biggest so far by Avago chief executive Hock Tan, who has developed a small chipmaker into a US$36bil (RM131.2bil) company through acquisitions since taking the helm nine years ago. The offer values Broadcom at $54.50 per share in cash, compared with a closing price of $57.16 on Wednesday, when the stock rose the most since 2001 after reports that a deal was imminent. The transaction is expected to close by the end of March 2016, and is subject to regulatory approval across various jurisdictions, as well as the approval of Avago’s and Broadcom’s shareholders. That presents a challenge to Qualcomm, which finds itself in a tough spot in the maturing microprocessor business, as smartphone makers such as Samsung, Apple Inc and Huawei put more effort into producing their own chips.

The combined company, to be based in Singapore and known as Broadcom, will be the third-largest US semiconductor maker by revenue, behind Intel Corp and Qualcomm Inc. The Broadcom purchase creates the world’s sixth-largest chipmaker by revenue and is the latest in a round of consolidation in the $300bn industry as the rising costs of production and design push manufacturers to combine. Now a Avago/Broadcom tie-up – which will take the name of Broadcom – potentially gives handset makers another viable supplier, giving them more leverage and putting even more pressure on Qualcomm, said IDC analyst Mario Morales. “The other material impact will come from the adjacencies that Qualcomm is trying to enter now, the data centre, infrastructure and the consumer area,” he added. “We see a lot of synergy in the technology they (Avago) are buying.” “I think there’s going to be a tremendous amount of growth in computing and resources dedicated to supporting the cloud,” Qualcomm chief executive Steve Mollenkopf said at last year’s Consumer Electronics Show. “We look at that as an opportunity for a company like ours.” NXP Semiconductors unveiled a deal in March to buy smaller peer Freescale Semiconductor Ltd. Hock Tan, president and CEO of Avago, lauded the deal as a “landmark transaction” for the industry, saying: “Today’s announcement marks the combination of the unparalleled engineering prowess of Broadcom with Avago’s heritage of technology from HP, AT&T and LSI Logic, in a landmark transaction for the semiconductor industry.

Amid much fanfare, the company had broken ground in March on a 73-acre campus near Irvine’s Great Park, intended to accommodate up to 8,000 workers. The US$37bil (RM134.9bil) price represents a premium of about 28% over Broadcom’s market value of US$28.85bil (RM105.2bil) as, before the Wall Street Journal reported that the companies were in talks. The flood of deals may be reaching its peak. “I’ve got my misgivings, this feels very frothy for me,” said Alex Gauna, an analyst at JMP Securities in San Francisco. “This… has a touch of recklessness to it.

Henry Samueli, co-founder and chief technical officer at Broadcom, said: “When [CEO] Henry Nicholas and I founded Broadcom we had a vision of creating the world leader in communications semiconductors. That $738 million project will go forward, a company spokeswoman said, though she did not elaborate on whether it would be as large as originally planned. “This transaction benefits all of Broadcom’s key stakeholders,” said Scott McGregor, president and chief executive of Broadcom. “Our customers will gain access to a greater breadth of technology and product capability. 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.

While Avago has a greater market value, at $36.3bn, the wireless chipmaker had higher sales last year, with $8.4bn, compared with its acquirer’s $4.9bn in sales. Tan’s strategy has been to look at potential targets that do not necessarily have the best strategic fit but have cost-cutting potential to build value. Avago and Broadcom first spoke about a potential merger in October 2014 but could not agree on a price, said people familiar with the matter who are unauthorised to speak publicly about it. Verified email addresses: All users on Independent Media news sites are now required to have a verified email address before being allowed to comment on articles. 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.

Although the two companies make different products, such functions as sales, administration and engineering support could be targeted for cutbacks, Avago executives said in a call with financial analysts. 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. 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.

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