Avago Secures European Union Approval for Broadcom Buy

Leading analog semiconductor manufacturer Avago Technologies Limited AVGO recently secured an unconditional approval from the European Union for its proposed acquisition of rival Broadcom Corp. BRCM.

The deal worth $37 billion is arguably the largest of its kind in the semiconductor chip industry and would create a behemoth with one of the most diversified communications platform in the semiconductor industry at combined annual revenues of approximately $15 billion.

The transaction also marks the latest round of consolidation in the $300 billion worth industry as the battle for survival gets murkier with intense price wars due to high costs of production and surging R&D expenses for innovative designs. This includes the acquisition of Altera Corp. ALTR by industry behemoth Intel Corporation INTC.

Acquisitions, over time, have been Avago's most favored mode for penetrating unexplored markets. The wireless chip manufacturer has continuously scoured for potential targets as it sought to venture into uncharted territories. Its revenues have more than doubled following its acquisition of two major industry players, LSI Corp. and PLX Technology last year. While LSI, its biggest deal to date, helped Avago expand into the fast-growing storage chip market, the PLX acquisition enabled Avago to fortify its presence in the enterprise and data center arena. Avago also acquired Emulex Corporation in order to expand its enterprise storage portfolio. Avago's ability to successfully integrate these companies has driven earnings accretion, and continues to boost overall growth.

Broadcom provides a portfolio of system-on-a-chip (SoC) and software solutions to manufacturers of computing and networking equipment, digital entertainment and broadband access products, and mobile devices. The SoC solutions inexpensively integrate analog, digital, and mixed signal circuitries that address the requirements of a broad clientele. The company is reportedly the largest supplier of Wi-Fi chips in smartphones and tablets. Broadcom's chips are also extensively used in modems by cable and telecom firms to deliver broadband Internet access.  

In contrast, Avago is a leading diversified global supplier of analog semiconductors targeting the wireless communications, wired infrastructure and industrial/auto markets. Although there is little product overlap between the two companies, Avago's interest in Broadcom signifies that it is now venturing into a business category. The semiconductor chip industry is also witnessing sluggish growth despite healthy strides in the digital and telecommunications markets. Consequently, synergistic benefits from the merger of these Zacks Rank #3 (Hold) stocks are likely to increase profitability through economies of scale and mutual sharing of manufacturing expertise, research and development costs and adjustment of staffing expenses.

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