One more merger takes place in the booming chip industry as Avago Technologies takes over fellow chipmaker Broadcom Corp. in an effort to support its parts supply to mobile and tablet businesses.
California based Avago Technologies Ltd. (AVGO, Financial) announced that it has taken over its peer Broadcom Corp. (BRCM, Financial) in a cash-and-stock deal worth $37 billion. The deal is supposedly going to help the chipmaker Avago in improving its mobile chip and data networking business apart from leveraging from the booming smartphones, tablets and other gadgets market to whom it supplies parts. Avago is offering $17 billion in cash and $20 billion worth of its shares to the shareholders of Broadcom.
The deal
Founded in 1961, Avago designs, develops, and supplies analog, digital, mixed signal and optoelectronics components and subsystems. Broadcom Corporation, on the other hand, is a semiconductor company involved into wireless and broadband communications business. When Avago announced its plan to takeover Broadcom, the latter’s market value was $28.85 billion following which the current deal has been made to offer a premium of 28% over Broadcom’s existing market value.
Shares of Avago went up 10% while Broadcom’s shares went largely up by 23%. This is comparable to the premarket trading when Broadcom’s shares were down 0.7% at $56.75 and shares of Avago were still riding high 3.8% at $146.64.
An edge for Avago
The addition of Broadcom into Avago’s portfolio is quite strategic considering the former’s proficiency in making semiconductors for a number of products including set-top boxes, cellphones and network equipment. It is also a big plus to Avago now as Broadcom is also famous for its connectivity chips meant to integrate Wi-Fi and Bluetooth technology, which are used by the top two smart phone companies, Apple Inc. (AAPL, Financial) and Samsung Electronics Co. Ltd (SSNLF, Financial). With increasing demand for cheaper chips and innovative products for the Internet connected gadgets, the industry is consolidating and the current deal of Avago will give it a stronger stand among its peers. It will now be able to provide end-to-end components for the networking and infrastructure markets as well as make its stand along with bigger names like Qualcomm (QCOM, Financial) and Intel (INTC, Financial).
In February this year, Avago had bought networking company Emulex Corp. (ELX) for $606 million while during around the same time, it had also bid for Freescale Semiconductor Ltd. (FSL, Financial) but lost it to NXP Semiconductors (NXPI, Financial) that made the buyout at $11.8 billion.
Future
The deal between Avago and Broadcom is expected to close by the first quarter of next year. The newly formed company with a stronger standing in the market will be named as Broadcom Ltd. and will be led by CEO of Avago Hock Tan. The combined company will give a 32% ownership to Broadcom shareholders. The deal is expected to save almost $750 million in costs within the next 18 months. The new company is also hoping to generate $15 billion in annual revenue with an enterprise value standing at $77 billion. Avago, apart from paying $17 billion from its cash funds, will also be undertaking a new debt worth $9 billion from a consortium of banks.
