Chipmaker Avago Technologies (AVGO) Thursday announced plans to buy rival Broadcom (BRCM) in a $37 billion cash and stock deal marking the latest consolidation of firms that supply parts for smartphones and other tech products.
The deal, one of the largest tech acquisitions in history, values the combined companies at $77 billion in enterprise value.
Avago and Broadcom predicted the combined firm would have “the most diversified communications platform in the semiconductor industry, with combined annual revenues of approximately $15 billion.”
This deal could mark the start of a new string of megamergers in the tech industry, says Christopher Rolland, an analyst with investment bank firm FBR & Co. “We have seen a slowdown in top buying growth rates. So one of your options to at least generate growth on the bottom line is to do accretive deals,” he said. “There is actually very little strategic overlap between the two companies. What they will get out of it is size.”
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The deal terms call for Singapore-headquartered Avago to pay $17 billion in cash and the economic equivalent of 140 million of the company’s shares, valued at $20 billion as of Wednesday, to acquire California-based Broadcom.
As a result, Broadcom shareholders are projected to own 32% of the combined company. For each of their current Broadcom shares, they will have the option to receive either $54.50 in cash, 0.4378 ordinary shares in a newly formed Singapore holding company, a restricted security equivalent to 0.4378 shares of the holding company or a combination of the three options.
Avago said it plans to fund the deal with a combination of cash on hand and $9 billion in new debt.
Avago shares closed up less than 1% at $142.38 Thursday. Broadcom shares closed down 1.58% at $56.25. However, the company’s stock had rocketed Wednesday, closing up 21.45% at $57.15, amid heavy trading sparked by market rumors and a report by The Wall Street Journal that the acquisition was imminent.
Hock Tan, president and CEO of Avago, will keep both those roles in the combined company, which will be known as Broadcom Limited. Henry Samueli, Broadcom’s co-founder, board chairman and chief technology officer, will join the board of the new company and serve as its chief technology officer.
Henry Nicholas, a Broadcom co-founder and past CEO, will serve in a strategic advisory role in the combined company, and will report to Tan.
“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,” Tan said in a statement issued with the deal announcement. “Together with Broadcom, we intend to bring the combined company to a level of profitability consistent with Avago’s long-term target model.”
Scott McGregor, Broadcom’s president and CEO, predicted the transaction would benefit all of the company’s key stakeholders.
“Our customers will gain access to a greater breadth of technology and product capability,” McGregor said in a statement issued by the companies. “For our shareholders, the transaction provides both compelling up-front value as well as the opportunity to participate in the future upside of the combined business.”
The planned acquisition is expected to help the combined company cut cost as it battles competition to supply vital products for the tech market. The companies predicted the deal would generate $750 million of projected annual cost synergies within 18 months.
Since the companies have different product lines, they will achieve limited R&D savings, Rolland says. Among Broadcom’s strengths are its WiFi chips for smartphones – Apple and Samsung are buyers. Avago’s FBAR frequency filters are found in Apple and Samsung devices, too.
For the two companies, “there’s no product overlap so they won’t lose any sales in areas where they are operating,” Rolland said. And they could cement customer relationships with “some price bundling” of complimentary products, he said.
The combination of Broadcom, listed ninth in an Electronics Weekly 2014 ranking of the world’s largest semiconductor firms, and Avago, ranked 17th, is expected to make the proposed combination the industry’s sixth-largest chipmaker.
The companies said both of their boards of directors had unanimously approved the transaction. The deal is expected to close by the end of next year’s first quarter, subject to regulatory approval, as well as approval by Avago and Broadcom stockholders, the firms said.
Expect more tech industry deals, Rolland says. Intel (INTC) could still acquire Altera (ALTR) and Texas Instruments (TXN) might be surveying smaller chip makers such as Microchip Technology (MCHP), Analog Devices (ADI), Atmel (ATML) and Maxim (MXIM).
“Money is still cheap,” he said. “So those dynamics are sort of coming together to cause this consolidation.”