Mizuho Analyst Saw $35 Billion Price Tag For Broadcom

Editor's note: This story was written before Avago officially announced at 7 a.m. ET Thursday that it will purchase Broadcom for $37 billion in cash and stock.

Avago Technologies Ltd (NASDAQ: AVGO) could substantially boost earnings with its rumored acquisition of Broadcom Corporation (NASDAQ: BRCM), an analyst said Wednesday.

Avago's Chief Executive Hock E. Tan "is focused on being number one or number two of three players in any market," said Mizuho's Vijay Rakesh, estimating a Broadcom price of $35 billion.

Hock seeks to "drive the oligopoly to maintain pricing" and Avago's 40 percent operating margin, according to Rakesh, who maintained a Buy rating on Avago.

Broadcom shares soared nearly 22 percent on merger talks reported Wednesday by The Wall Street Journal, although neither of the two chipmakers confirmed negotiations.

Avago closed up 7.76 percent at $141.49.

Given Singapore's low tax rate and potential synergies, acquiring Broadcom could boost Avago's earnings, "given the right sized debt deal," Rakesh said.

Rakesh assumes Avago will borrow $20 billion and pay $15 billion in shares to close a deal. Rakesh's estimated price for Broadcom of $35 billion, implies $63.75 a share.

At Wednesday's market close, Broadcom's market capitalization had risen to $33.42 billion versus Avago's $35.47 billion.

A favorable deal could result in Avago 2016 earnings of $11 a share, according to Rakesh, versus his current estimate of $9.31 for the company's profits next year.

Rakesh said his $150 target for Avago is based on the $9.31 earnings estimate.

Avago is expected to post second quarter earnings Thursday of $2.01 a share. For all of 2015 analysts on average forecast profits of $8.44 a share.

The rumored deal, also reported by sources quoted by Bloomberg, appeared to drive a number of semiconductor stocks higher Wednesday.

Both Semtech Corporation (NASDAQ: SMTC) and M/A-COM Technology Solutions Hldgs Inc. (NASDAQ: MTSI) closed up more than 5 percent.

Skyworks Solutions Inc (NASDAQ: SWKS), Qorvo Inc. (NASDAQ: QRVO) and Cavium Inc. (NASDAQ: CAVM) all gained more than 4.7 percent and other shares in the sector closed higher.