MorningWord 5/28/15: Fishin’ Chips

by Dan May 28, 2015 9:26 am • Commentary

This morning it is being confirmed that Singaporean based Avago Technologies (AVGO) has reached an agreement to pay $37 billion ($17 billion in cash and the balance in stock) for Broadcom (BRCM).  The stock broke out yesterday to new 15 year highs on rumors of the deal:

BRCM chart since 1998 from Bloomberg
BRCM chart since 1998 from Bloomberg

When I see a chart like that, my first response is that BRCM’s board just sold a call against their stock.  While deal chatter caused the breakout the stock seemed already poised to on its own own following an epic consolidation between $25 and $50 last lasted for a decade.

The announced deal is the largest in the history of the semiconductor industry. But it’s important to note that cross border semi deals have not been a lay-up (see the recent demise of the Applied Materials/Tokyo Electron deal). And despite little overlap for the two companies, a bid by a U.S. company like INTC could be viewed as far cleaner and more likely to close. I suspect this story is just getting started.

All of the sudden the semi industry has a bout of merger fever.  In early March NXP (NXPI) announced a $12 billion bid for Freescale (FSL) and then in early May Intel (INTC) confirmed they were in talks to acquire Altera (ALTR) that would now look like a $15 billion deal, again little overlap here.

While we are playing matchmaker, let’s assume INTC or QCOM don’t counter AVGO’s bid for BRCM, and INTC walks away from ALTR. What about the potential for INTC to buy QCOM?? That would be the mother of all semi deals.  Back in January I made the following case for such a deal:

But what about a merger with PC and server chip behemoth INTC who has been losing billions in their efforts to break into the mobile chip business.  Given both companies lack of overlap in their core, I suspect there would be little concern by regulators as one is factory heavy while the other is basically factory-less.  The combination would create a $300 billion market cap company that could better compete with Chinese rip-offs and with Samsung.  Also, given the proximity of both companies in California, there are cost savings from redundancies.  Both companies are cash rich with what would be a tiny debt load (just INTC’s $14 billion) so the combined entity could lever up in a massive way while rates are still very low.  Debt would likely be a huge part of getting a deal done that would be acceptable to QCOM shareholders.  As for shareholders, Blackrock, Vanguard and State Street own a combined 16% of each company and would likely see both stocks appreciate on a proposed merger.

If things are getting silly in m&a-ville, then why not think big??