Avago buys Broadcom in $37B deal to get further enmeshed in wireless networking chips

Avago Technologies confirmed it will buy rival Broadcom for $37 billion, in a further consolidation of the chipset industry. Avago said it will use the deal to get further involved in the wireless infrastructure, networking and broadband technology markets.

Broadcom decided to exit the cellular baseband market in mid-2014 after concluding it was losing too much money. However Broadcom is still a major supplier of Wi-Fi silicon and of Wi-Fi combo chipsets, which include Bluetooth, FM radio and other technologies. Additionally, Broadcom is a player in the Internet of Things market.

Avago designs, develops and supplies a variety of analog, digital and mixed signal chipsets aimed at the wireless and enterprise-storage markets. The company was founded in 1961 as an electronics division of Hewlett-Packard and is based in San Jose, Calif., and Singapore.

Nomura analyst Romit Shah wrote in a research note on Wednesday that a deal with Broadcom would be a strategic fit for Avago and let it provide end-to-end components for the networking and infrastructure markets, according to Reuters.

The deal consists of $17 billion in cash and $20 billion in stock and values Broadcom at $54.50 per share in cash. The offer price represents as 16 percent premium to where Broadcom's shares closed Tuesday, before rumors of the deal surfaced.

The deal is expected to close by the end of the first quarter of 2016, the companies said. The combined company will have total annual revenues of around $15 billion. The deal represents the largest ever in the technology industry, according to Bloomberg data.

Following the completion of the transaction, Avago CEO and President Hock Tan will continue to serve those roles in the combined company, which will adopt the name Broadcom Limited. Broadcom Chairman, co-founder and CTO Henry Samueli will join the board of the combined company. In addition, Samueli will be appointed CTO of the combined company. Henry Nicholas, co-founder and a past CEO of Broadcom, will serve in a strategic advisory role within the combined company, and will report to Tan.

The semiconductor industry has been going through a period of consolidation, with rumors of more on the way. In March, NXP agreed to buy Freescale Semiconductor for around $11.8 billion. In February, Avago agreed to buy Emulex, which specializes in network connectivity, monitoring and management, for around $606 million. In addition, MicroSemi announced a $389 million deal in March to buy Vitesse Semiconductor; Latice Semiconductor said it would pay $600 million in January to purchase Silicon Image; and Cyrpus laid out a $1.6 billion deal for Spansion in a transaction that closed in March.

Meanwhile, the New York Post reported earlier this month that Intel had resumed talks to acquire Altera in what might be a $13 billion deal. Intel and Altera have declined to comment on the rumors.

Tirias Research analyst Jim McGregor noted that Avago is mostly focused on core networking technology, partly through its $6.6 billion deal for LSI Logic in May 2014. Avago has typically competed against the likes of NXP and Infineon, with customers being networking giants like Cisco Systems, McGregor noted.

So why all the M&A in the chipset industry? "When you have a limited customer base, and the customer base isn't growing, you look for other ways to supplement your growth and supplement your product line," McGregor said.

For more:
- see this release
- see this WSJ article (sub. req.)
- see this Bloomberg article
- see this Reuters article

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