Analysis of $37B Avago-Broadcom Deal: Risky Financing & Uncertain Synergies


“We have seen a slowdown in top buying (economic) growth rates. So one of your options to at least generate growth on the bottom line is to do accretive deals….. This deal could mark the start of a new string of mega-mergers in the tech industry,” said Christopher Rolland of FBR &Co.  Of course, he was referring to Avago Technologies proposed $37 billion buyout of semiconductor heavy weight Broadcom.  “Money is still cheap. So those dynamics are sort of coming together to cause this consolidation,” Rolland added.

The value of a combined Avago-Broadcom would be approximately $77 billion. The new company (which is to be called Broadcom Ltd) will have annual revenue of approximately $15 billion. 

Broadcom Backgrounder:

Broadcom, based in Irvine, Calif., was founded in 1991 by Henry Samueli, PhD – an electrical engineering professor at the University of California, Los Angeles (UCLA) and Henry Nicholas III (Samueli’sPhD student) who left the company in 2003. Mr. Samueli, the owner of the Anaheim Ducks hockey team, is Broadcom’s chairman and chief technology officer. 

Broadcom’s revenues last year were nearly twice the size of Avago’s.  The acquisition would take Avago into new semiconductor markets, including cable modems, TV set-top boxes, Wi-Fi and data center switching systems.  Broadcom is by far and away the leader in Ethernet switch chips for equipment in both premises and cloud based data centers as well as telco and campus networks.

The mainstream media, including the NY Times and WSJ, incorrectly reported that Broadcom has a very large share of the mobile communications chip market.  In fact they have zero percent share of that market. The company does have a very large market share in WiFi chips, but Qualcomm’s Atheros Communications Division is closing in fast.

Broadcom acquired WiMAX chip leader Beceem Communications in 2010 for $316M, believing Beceem could transition it’s OFDMA based WiMAX technology to LTE, but that didn’t happen.  Renesas Mobile was then acquired which gave Broadcom a fully qualified LTE modem, and products. However, facing very tough competition, Broadcom ultimately shut down its cellular efforts leaving it with 0% market share in the “mobile communications” chip market. [The leader in wireless chips, especially cellular, is Qualcomm.  Three are no close competitors.]

Furthermore, Broadcom took an impairment charge of $501 million related to the NetLogic acquisition in 2013.  Not every deal works out!


Where are the Synergies?

Junko Yoshida, Chief International Correspondent for EE times wrote:

I need to be enlightened on how this (deal) advances the companies’ technologies. How will this deal make it better for engineers at the two companies working on new products and technologies? Am I cynical in suspecting that Avago wanted Broadcom purely for the sake of getting bigger?

Where is the affinity – or any apparent good vibe – connecting Avago to Broadcom? Aren’t the “soft” factors of corporate culture at least as important for successful mergers as a momentary splash on the stock market?”

Continuing, Yoshida wrote:

“Avago’s big appetite for acquisitions is well known. But this sort of abrupt switch from one target to another suggests recklessness. Or maybe I’m not cynical at all, but naïve. After all, company M&As aren’t personal. It’s not like Avago and Broadcom are engaged to be married.

I’ve always felt a great respect for Broadcom. I’ve admired savvy business strategy, and more significantly, a technology vision led by Henry Samueli, Broadcom’s co-founder, chairman of the board, and chief technology officer.

Without Broadcom, we might well be bereft of all the Ethernet, broadband connections the company has enabled. Broadcom, like a well-oiled machine, has stayed true to its motto – “integration, integration, integration” – to dominate the digital SoC world.

I don’t think I’m alone in viewing Broadcom as the best of the best among U.S. fabless chip companies.  But this merger begs a big question: Where will Broadcom integration vision turn? Will Broadcom’s team be allowed to sustain its discipline in execution? Most important, will Henry Samueli stay?”

Quotes from Broadcom & Avago CEOs:

“This is a landmark day in the history of the industry,” said Scott McGregor, Broadcom’s 58-year-old CEO, during a conference call after the deal was announced last Thursday.

  “Today’s announcement marks the combination of the unparalleled engineering prowess of Broadcom with Avago’s heritage of technology from HP, AT&T (Microelectronics), and LSI Logic in a landmark transaction for the semiconductor industry,” Avago CEO Hock Tan (62 years old) said in a statement. “Together with Broadcom, we intend to bring the combined company to a level of profitability consistent with Avago’s long-term target model.”

Financing the Deal:

Avago Technologies plans to finance its $37 billion purchase of Broadcom, with $15.5 billion of new syndicated term loans.  Financing will come from Bank of America Merrill Lynch, Credit Suisse, Deutsche Bank, Barclays, and Citigroup, sources said.  The issuer expects to refinance $6.5 billion of existing debt facilities and raise $9 billion of new money. A $500 million revolver would be undrawn at closing. The transaction would leverage Avago at roughly 2.7x, giving full credit for $750 million of synergies. Net of $1.3 billion of cash on hand, adjusted leverage would fall to 2.5x, according to an investor presentation.

Avago Built on Debt Fueled Takeovers: 

Avago has used takeovers and mergers as an engine for economic growth and increased market capitalization. Some analysts have compared the company to Valeant Pharmaceuticals, a drug maker whose meteoric growth has been powered by serial acquisitions.   Avago’s relatively short company history is truly amazing and one for the record books. 

  • In 2005, private equity firms KKR and Silver Lake Partners acquired Agilent’s Semiconductor Products Group (SPG) for $2.66 billion.  (Agilent was spun off by HP).  In December of that year, Avago Technologies was established, creating the world’s largest privately held independent semiconductor company. 
  • From 2007 to its IPO on August 6. 2009, Avago acquired the fiber optic component and Bulk Acoustic Wave businesses from Infineon (formerly Siemens Microelectronics) and then Nemicon to complement its motion control product line.  When AVGO went public in 2009, it seemed like a modest player in the semiconductor industry with a market value of just $3.5 billion.  But few anticipated its future growth through debt funded deal making.
  • Since Avago became a public company in 2009, its management team has pursued a half-dozen acquisitions. The biggest of which was its $6.6 billion takeover of the LSI Corporation (formerly LSI Logic), a networking and storage chip manufacturer, in late 2013. It was funded by a $4.6 billion leveraged loan which was ~70% of the price paid for LSI.  The purchase price for LSI was more than six times Avago’s cash on hand at the time.
  • Note that LSI had previously acquired Agere (formerly AT&T Microelectronics, then part of Lucent Technologies, IPO in March 2001) which at one time had a market cap of > $10 billion!
  • Early this year, Avago struck a $606 million takeover deal for Emulex. 
  • Aiding Avago’s acquisitions are several rare factors, including a roughly 5% tax rate that comes from being based in Singapore and ready access to low-cost debt financing.  Note that Singapore is the company’s headquarters ONLY for tax reasons.  Neither the original company nor any of its acquisitions were ever based there.


Meteoric Rise in Avago Stock Price:

AVGO went public August 6, 2009 at $15 a share. The stock closed Friday at $148.07.  That’s an increase of 987.13% and triple its value of December 2013.   Evidently, Avago’s aggressive acquisition strategy has paid off big time for its shareholders.

For more financial implications of this merger, please read this blog post by the Curmudgeon and Victor Sperandeo.

Addendum:  Intel Buys Altera for close to $17B

On Monday, June 1st, Intel announced it would buy FPGA chip maker  Altera Corp. for $16.7B – the costliest in the Santa Clara, CA, company’s 47-year history. Some Wall Street analysts question whether Intel paid too much.