Broadcom Limited: Mega Merger Is The Beginning Of A New Era In The Semiconductor Space
SevenSeas Investment Research • 85 Comments
SevenSeas Investment Research • 85 Comments
Will Avago Be A Rock In A Turbulent Semiconductor Sea?
Stephen Simpson, CFA • 10 Comments
Stephen Simpson, CFA • 10 Comments
Tue, Nov. 8, 1:42 PM
- Broadcom (AVGO +0.4%) has a $6.5B bridge loan lined up from six banks for its acquisition of Brocade (BRCD -0.1%), Reuters reports.
- The companies came to agreement on an all-cash $5.9B buyout of Brocade (including debt) last Wednesday.
- Signing on to the unsecured loan, according to Reuters: BofA Merrill Lynch, Deutsche Bank, Barclays, Bank of Montreal, Citigroup and Credit Suisse. They'll hold the loan until permanent financing is in place by next April, when closing is expected.
Wed, Nov. 2, 7:16 AM
- As has been floated for the past few days, Broadcom (NASDAQ:AVGO) is buying Brocade (NASDAQ:BRCD), with the all-cash price working out to $12.75 per share.
- Broadcom expects to fund the deal with new debt and cash already on the balance sheet. The purchase is expected to be immediately accretive to non-GAAP free cash flow and EPS. The company sees Brocade's FC SAN business as contributing about $900M of pro forma non-GAAP EBITDA is FY18.
- A conference call is set for 8 ET.
- BRCD +8.1% to $12.15 premarket.
Tue, Nov. 1, 3:25 PM
- If Broadcom (AVGO -1.4%) goes through with an acquisition of Brocade Communications (BRCD +7.3%), it would combine its $67B business with one now worth $5.6B after two days of sharp gains.
- In a deal (which is not final and could fall apart), Broadcom would keep Brocade's Fibre Channel and storage business (about $1.5B in annual revenues) but look to divest the networking business -- much of which was acquired in Brocade's own acquisition of Ruckus Wireless.
- Broadcom would bulk up its offering tied to data center backbones with the addition of a high-margin fiber business like Brocade's.
- Brocade is now up 31% over the past two days, moving it into positive ground for 2016 (up 23.9%).
Tue, Nov. 1, 3:15 PM
- Brocade Communications (NASDAQ:BRCD) has made another sharp move up, now +7.1%, on a report that it's near a deal to be acquired by Broadcom (AVGO -1.5%).
- The news comes a day after its deal-chatter-fueled 22% rise.
- The deal could be announced later this week, Reuters reports.
- RBC Capital has upgraded shares to Outperform and raised its price target to $14, making room for 29% more upside from the new level set. As with others, RBC is pointing to Broadcom (NASDAQ:AVGO) chief Hock Tan as a very interested party.
- “We think that Brocade makes sense as a strategic asset to the right operator or CEO (Hock Tan as a solid operator), which would lead to mid-single-digit accretion for the acquirer (35%+ operating margin potential),” writes Mitch Steves.
- If Broadcom can achieve $200M in opex synergies in a deal, it's $0.65 accretive to the acquirer, Steves says. And he also points to other potential buyers, including IBM, Oracle and Hitachi (OTCPK:HTHIY).
Mon, Oct. 31, 3:57 PM
- Brocade Communications (NASDAQ:BRCD) is up 22.3% and hanging right at 52-week high range after news that it's in talks to sell itself and getting close to the end of that process.
- A deal could be announced this week, Bloomberg reports, and one of the interested parties is reportedly Broadcom (AVGO +0.7%), which could be interested in supplementing its switch-chip business with Brocade's networking gear. Broadcom CEO Hock Tan has said he's interested in acquisitions.
- Such a deal might allow for better competition against much bigger rival Cisco Systems (CSCO +0.4%). "A purchase by Broadcom (Avago) would be a strategic move by Broadcom to vertically integrate in an IP switching and routing market that has increasingly moved to merchant silicon," notes Stifel analyst Aaron Rakers.
- He's maintained a Hold rating and $10 price target (the boost today has put Brocade at $10.63). He doesn't know any inside information about activity around Brocade this week but notes that for years, talk has persisted that Brocade might sell itself to suitors like H-P (NYSE:HPQ), Oracle (NASDAQ:ORCL) or IBM (NYSE:IBM).
- With current net debt (about $440M) and at $11/share, Brocade would come at about a $4.9B enterprise value, 7.3 times EBITDA, he says.
Mon, Oct. 24, 4:17 PM
- Analysts Mitch Steves and Amit Daryanani rate Microsemi (NASDAQ:MSCC) a "Top Pick" with a $48 target (current price $40.36).
- In considering the semiconductor sector on broad terms, the analysts believe mid-cap companies such as Microsemi present attractive opportunities to larger names on margin profiles and valuations. For Microsemi specifically, Texas Instruments (NYSE:TXN), Broadcom (NASDAQ:AVGO) and Maxim Integrated Products (NASDAQ:MXIM) are offered as potential acquirers, with Texas Instruments making the "most sense."
- Should Microsemi's leverage reduce from a current 3.7x level toward a 3x level, the analysts project the company at that point to firmly represent an attractive target.
Tue, May 24, 3:37 PM
- Xilinx (NASDAQ:XLNX) is up 5.9% this afternoon on heavy volume after a StreetInsider report saying the company has drawn a $15B takeover offer, but from a mystery suitor.
- The company has been considered the only large-cap chipmaker with the attributes of a good target, after Intel's purchase of Altera. Apple suppliers including Qualcomm (NASDAQ:QCOM) or Broadcom (NASDAQ:AVGO) are the most likely suitors for Xilinx.
- Xilinx used yesterday's analyst day to reiterate guidance for fiscal 2017 (sales growth of 4-8%, opex growth of 7-9%) and prompt strong bullishness from Pacific Crest. Analyst John Vinh sees the firm taking share in field-programmable gate arrays from Intel's Altera, which has faced delays and has "already lost at 20 nm and 14 nm."
- Xilinx is expecting $750M in incremental revenue over the next five years, a modest 6% in compound annual growth. "Of the $750 million, $500 million is expected to be from market expansion, while $250 million should be from PLD share gains. This would imply ~$3.25 in EPS, which at 20x suggests fair value of $65," Vinh writes.
- That $65 value would be 37% upside from today's (higher) price; Vinh has a price target of $55 (16% upside).
- William Blair's Anil Doradla thought the overall tone was good but "lacked conviction" and was light on comment about the company's key wireless/wireline segments. He's maintaining an Outperform rating.
Thu, Apr. 28, 11:28 AM
- Along with its Q1 results, Cypress Semi (CY +2.7%) announces it's buying Broadcom/Avago's (AVGO +1.1%) wireless IoT chip unit, which sells, Wi-Fi, Bluetooth, and Zigbee chips, for $550M in cash. Cypress is also acquiring Broadcom's WICED IoT brand and related SDK/developer ecosystem.
- With the Broadcom unit having revenue of $189M during the last 12 months, Cypress is paying 2.9x trailing sales. The deal is expected to close in Q3.
- Cypress: "The acquisition strengthens Cypress's position in key embedded systems markets, such as automotive and industrial, and establishes it as a leader in the high-growth consumer IoT market, a segment that includes wearable electronics and home automation solutions."
- Broadcom notes the deal doesn't cover its wireless connectivity offerings for phones, notebooks, set-tops, and Wi-Fi access points. The company has said it's looking to divest some assets in the wake of the Broadcom/Avago merger, as it tries to streamline its offerings and pay off some of the debt taken on to help finance the merger.
- Separately, Cypress states long-time CEO T.J. Rodgers will step down this week. While the board searches for Rodgers' successor, daily operations will be handled by an Office of the CEO featuring several senior execs.
- Rodgers: "This March, Valeta and I celebrated my 68th birthday in Mexico. Upon reflection, while I am still passionately interested in Element 14, silicon, I have always planned not to be spending most of my time in the last decade of my career immersed in the details of the operations ... And, to be completely candid, the board and even the executive staff have urged me to bring new blood into operations." He'll continue to work on some projects for Cypress.
- Cypress is guiding for Q2 revenue of $440M-$470M and EPS of $0.10-$0.14, in-line with a consensus of $454.8M and $0.11. Both Cypress and Broadcom are higher.
Thu, Mar. 10, 6:44 PM
- Notably, Marvell doesn't go as far as to say it isn't looking to sell itself. The NY Post reported last weekend Marvell is now open to a sale, and speculated Avago, now known as Broadcom (NASDAQ:AVGO), could buy the company. Light Reading reported last summer Avago is looking to bid for Marvell once it's done acquiring Broadcom.
- MRVL -0.8% after hours to $9.92.
Mon, Mar. 7, 9:49 AM
- The NY Post reports Marvell (MRVL +2.5%) is now open to selling itself. Broadcom (AVGO -1%), the product of a giant recently-closed merger between Avago and (traditional) Broadcom, is mentioned by a source as a potential buyer.
- Light Reading reported last July Avago is looking to bid for Marvell after the Broadcom deal closes. In the event of a deal, there could be some antitrust scrutiny regarding Ethernet and Wi-Fi/Bluetooth combo chip overlap.
- The Post's report comes shortly after the end of Marvell's Audit Committee probe (no fraudulent activity was found), and a month after activist Starboard Value disclosed a 6.7% stake (followed a 2013 stake disclosure by KKR), while calling for fresh cost cuts. Marvell also recently settled Carnegie Mellon's infringement suit against the company for $750M.
- Marvell is higher on a morning the Nasdaq is down 0.3%.
Nov. 10, 2015, 6:21 PM
- As expected, both Avago (NASDAQ:AVGO) and Broadcom (NASDAQ:BRCM) shareholders have approved the companies' planned merger. Avago states over 99% of shareholder votes were cast in favor of the deal. (PRs: Avago, Broadcom)
- The deal is expected to close in late 2015 or early 2016, following (expected) regulatory approvals; EU regulators are reportedly set to sign off. As previously announced, Broadcom shareholders can elect to receive either $54.50/share in cash or 0.4378 shares (current value of $52.47), with half the total payout in cash and half in stock.
- Avago fell 5.3% and Broadcom fell 3.3% in regular trading following a Credit Suisse report stating Apple has cut iPhone component orders by up to 10%.
Nov. 3, 2015, 6:19 AM
- EU antitrust regulators are set to unconditionally approve Avago Technologies' (NASDAQ:AVGO) proposed $37B takeover of Broadcom (NASDAQ:BRCM), according to Reuters.
- The acquisition is one in a series of global semiconductor deals this year, with consolidation driven by demand for cheaper chips and new products to power Internet-connected devices.
Oct. 6, 2015, 12:57 PM
- Skyworks (NASDAQ:SWKS) has tumbled towards $75 after announcing it's buying storage and telecom IC vendor PMC-Sierra (NASDAQ:PMCS) for $2B in cash on hand. (PR)
- Fellow RF chipmaker Avago (AVGO -6.7%), which (thanks to the LSI acquisition) competes against PMC-Sierra in the storage controller market, is also off, as is merger partner Broadcom (BRCM -3.2%), which competes against PMC to an extent in the telecom IC and network processor markets. RF peer Qorvo (QRVO -3.3%) is also getting hit. The Nasdaq is down 1.2%.
- Possibly hurting the group: Skyworks has used the PMC deal to announce it expects FQ4 (calendar Q3) revenue of $880M and EPS of $1.52. That's slightly above prior guidance of $875M and $1.51 and a consensus of $876M and $1.51, but expectations have been high following a long string of beat-and-raise quarters.
- The PMC acquisition expands Skyworks' reach to a slew of non-RF chip markets and enterprise/telecom infrastructure end-markets. It's expected to yield $75M in cost synergies within 12 months of closing (expected in 1H16), and subsequently boost Skyworks' annual EPS by $0.75. Assuming that target is hit, Skyworks is paying 14x forward EPS.
- Update (1:04PM ET): BofA/Merrill is defending Skyworks and Avago, arguing forward P/Es of less than 10 make shares very cheap.
- Update 2 (5:01PM ET): The group staged a comeback in afternoon trading. Skyworks closed down 1.4%, Avago 3.4%, Qorvo 1.1%, and Broadcom 1.6%. The Nasdaq closed down 0.7%.
Oct. 1, 2015, 10:58 AM
- Ahead of the Broadcom merger, Avago (AVGO -4%) is selling its optical module unit to contract manufacturing giant Foxconn for a yet-undisclosed sum. Over 900 Avago employees will join Foxconn.
- Avago will hold onto its optical component business, and serve as Foxconn's exclusive optical component supplier. The deal comes two years after Avago bought optical component maker CyOptics for $400M.
- Though its acquisitions (CyOptics, LSI, PLX, Emulex, and soon Broadcom) have received more attention, Avago hasn't been shy about selling assets along the way. Last year, the company sold its flash storage module/controller chip business to Seagate for $450M, and its Axxia network processor unit to Intel for $650M.
- Shares are selling off on a morning the Nasdaq is down 0.6%, and the Philadelphia Semi Index down 2.4%.
Aug. 6, 2015, 9:53 AM
- Qualcomm (QCOM -0.5%), via its Atheros Wi-Fi/connectivity chip unit, is buying DSL modem/infrastructure IC and home gateway processor vendor Ikanos (NASDAQ:IKAN) for $2.75/share, or roughly $47M based on Ikanos' Q2 diluted share count. The price represents a 57% premium to Ikanos' Wednesday close. The deal is expected to close by year's end.
- Ikanos' products complement Qualcomm/Atheros home Wi-Fi and wireline networking offerings. Qualcomm: "The combination of Qualcomm Atheros' broad home gateway IP portfolio, including Wi-Fi, powerline, small cell, and Ethernet switch technologies, and Ikanos' advanced wired modem technology, is designed to create a complete solution for a wide range of home gateway products to better serve the carrier segment." Broadcom (NASDAQ:BRCM) and Marvell (NASDAQ:MRVL) are among the other companies competing in this space.
- Qualcomm CEO Steve Mollenkopf suggested last week his company would make new chip acquisitions.
Jul. 17, 2015, 4:16 PM
- Not content with its recent ~$37B cash/stock deal to merge with Broadcom (BRCM +0.2%), acquisition-hungry Avago (AVGO -0.8%) is looking to bid for Broadcom rival Marvell (MRVL +0.5%), "a reputable source" tells Light Reading.
- Marvell moved slightly higher following the report. With a current $6.7B market cap - a deal could require a price above $8B - Marvell would be a relatively easy fish to swallow. However, its product line overlaps with Broadcom's in the Ethernet transceiver, Ethernet switching chip, and Wi-Fi/Bluetooth combo chip markets (among other areas), and the Ethernet overlap could result in antitrust scrutiny.
- There has been speculation Avago isn't done with its buyout binge. The company snapped up LSI, PLX Technology, and Emulex prior to the Broadcom deal, and has a good track record of reaping major cost synergies from acquisitions.
- Meanwhile, Marvell has been viewed as a potential acquisition target as the chip industry continues consolidating. Shares rose earlier this week on a report of buyout interest from state-owned Chinese firm PDSTI.