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Summary

Avago Technologies announced reaching a definitive agreement to acquire Broadcom Corp. for $37bn. The new business, to be called Broadcom Limited, will be a well-diversified communications company positioned to serve high-growth markets focused on data centers and the Internet of Things. Ovum finds semiconductor companies such as Broadcom Limited need to be sufficiently large to be competitive.

Scale needed to compete in communications market

Avago’s purchase of Broadcom, in the largest recorded semiconductor transaction to date, will create the “most diversified communications platform in the semiconductor industry” according to the company’s press release. Avago has been on a tear buying companies – it acquired LSI Corp. for $6.6bn in 2013, Emulex for $606m in 2015, and CyOptics for $400m in 2013. But Avago is not the only semiconductor company bulking up. NXP has entered an agreement to acquire Freescale for $11.8bn, and Intel is rumored to be in talks to acquire Altera for $14bn.

The wave of semiconductor acquisitions is not isolated. Ovum believes the companies are responding opportunistically to good stock market performance, a stable economy, and transactions up the food chain. Nokia, for example, announced reaching an agreement to acquire Alcatel-Lucent, spurring rumors of an Ericsson transaction. And at the carrier level, Charter Communications plans to buy Time Warner and Bright House Cable in the latest announced consolidation.

The transactions improve the positioning of these companies. This new marketplace is driven by Google, Facebook, Amazon, and other web-scale service providers with deep pockets and a relentless growth appetite. Also contributing to the competitive atmosphere is the rise of Huawei and its strength in the China market; Huawei’s vertical integration with HiSilicon for internal semiconductor supply gives it extra leverage.

Semiconductor companies, representing the bottom of the communications market food chain, need to be sufficiently large to support the demands of their customers under ever-increasing pressure to reduce prices, keep up with high-volume demand, and shorten time to market. Broadcom Limited will be challenged to deliver on the estimated $750m in synergies and continue to expand in markets developing around data centers and the Internet of Things. It certainly has the right piece parts to attack these opportunities. Should the deal close, execution will be the key factor.

Appendix

Further reading

“Nokia/Alcatel-Lucent tie-up could have far-reaching impact on telecom gear market,” TE0006-001051 (April 2015)

“NXP-Freescale merger targets connected car, IoT opportunities,” TE0017-000030 (March 2015)

“Avago raises networking stake with LSI acquisition,” TE003-000597 (January 2014)

“Avago to acquire CyOptics for bigger piece of data center pie,” TE003-000553 (April 2013)

Author

Daryl Inniss, Practice Leader, Components

daryl.inniss@ovum.com

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