Bank Of America: The M&A Train Rolls On At Avago

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In a report published Thursday, Bank of America analyst Vivek Arya commented on recent media reports which suggested
Avago Technologies LtdAVGO
has contacted
Maxim Integrated Products Inc.MXIM
,
Xilinx, Inc.XLNX
and
Renesas Electronics Corporation
for a potential acquisition. Arya noted that regardless of any M&A outcome, Avago remains a sector top pick given organic growth drivers in mobile RF and data center along with the company's "consistency" of execution. In terms of M&A activity, Arya stated that Avago has historically acquired low or no growth firms that help it diversify away from smartphones, carry strong gross margins, are in less competitive sole-source/duopoly positions and have room for cost-cutting and operating synergies. The analyst further suggested that Maxim Integrated and Xilinix appear to both "fit this mold" while Renesas has a low gross margin of around 40 percent (versus Avago's 59 percent) and its Japan-based assets could present "integration challenges."
What Maxim Has To Offer
Arya argued that an acquisition of Maxim Integrated Products presents a longer-cycle industrial and autos exposure, potential for cost synergies in its 20 percent smartphone and comms/data center segments, "modestly" stronger gross margins in the 60 percent to 61 percent rage and substantial headroom to expand operating margins from current 25 percent levels towards Avago's 40 percent level. However, the analyst continued that potential risks to a combination include weak sales growth (given Maxim's zero percent topline compounded annual growth rate between 2010 and 2015E) and addition of manufacturing fabs to Avago's primarily fabless footprint.
What Xilinix Has to Offer
Arya also presented the case for an acquisition of Xilinix. Such an acquisition would offer Avago low growth but highly profitable networking, industrial, autos and data center assets in the 69 percent to 70 percent gross margin range. With
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Intel CorporationINTC
potentially looking at acquiring
Altera CorporationALTR
(based on various media reports), the analyst thinks there could be some "scarcity value" to FPGA leader Xilinix. On the other hand, the company is fabless, so there exists limited manufacturing integration risks but a combined company could potentially expose Avago to Moore's cost/complexity since FPGAs need leading edge transitions.
Bottom Line
Arya suggested a hypothetical scenario in which Maxim Integrated Products could be acquired at $40 per share at Xilinix acquired at $53 per share. Shares of Avago are Buy rated with a $150 price target.
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Posted In: Analyst ColorAnalyst RatingsavagoBank of AmericaFPGAMaxim IntegratedMergers & AcquisitionRenesasVivek AryaXilinix
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