By Dana Mattioli, Dana Cimilluca and Shayndi Raice
Chip maker Avago Technologies Ltd. is in advanced talks to buy
rival Broadcom Corp. in a deal worth more than $35 billion, the
latest in a wave of deals for the companies that supply parts to
power smartphones, tablets and other gadgets.
The talks come as technology stocks are surging and investors on
Wednesday pushed the Nasdaq Composite Index up nearly 74 points to
5,106.59, a record closing high. At the same time, large chip
makers are turning to acquisitions after struggling with anemic
revenue gains.
Growth has been hard to come by for Broadcom, a 24-year-old
company that makes communications chips for tablets and
smartphones, and supplies the Internet links for cable-television
and telecommunications devices. It earned $1.41 billion last year
but has struggled to lift sales. Its revenue was up just 1.5%, to
$8.4 billion.
"It's really economically difficult to be a small semiconductor
maker now," Broadcom Chief Executive Scott McGregor said earlier
this year. "The larger companies are going to look for
consolidation."
Avago, the acquisitive former semiconductor unit of
Hewlett-Packard Co., makes chips for wireless-communications and
corporate-data-storage markets. Based in San Jose, Calif., and
Singapore, it reported $4.3 billion in sales in the 12 months ended
Nov. 2.
Neither Avago nor Broadcom has the kind of dominance over
individual markets that better-known rivals such as Intel Corp. and
Qualcomm Inc. enjoy, and a merger could help address that. In
addition to consumer applications, Broadcom supplies the vast
majority of chips used in the latest networking switches found in
corporate data centers, a fast-growing business that could enhance
Avago's communications-focused revenue stream.
Broadcom was co-founded by a team led by engineers Henry
Samueli, who remains chairman and chief technology officer, and
Henry Nicholas III, a former chief executive who stepped down in
2003. Mr. Nicholas held about 25% of Broadcom's voting shares as of
the end of March, according to the company's most recent proxy
statement. Mr. Samueli held about 22%.
Avago once was part of Agilent Technologies Inc., which spun off
from H-P in 1999. Agilent later sold what's now Avago to
private-equity firms Silver Lake, KKR & Co. and other investors
in a $2.66 billion buyout.
Avago went public in 2009 after having incorporated in
Singapore, which is known for having a low corporate tax rate. In
its last fiscal year, Avago had a tax rate of less than 10%,
according to its annual report. In contrast, the U.S. statutory
corporate tax rate is 35%.
The company has been one of the more aggressive acquirers in the
semiconductor sector in the past two years, though a deal for
Broadcom would be by far its biggest ever. Since 2013, the company
has purchased five companies in the U.S. valued at about $8 billion
in total, including the acquisition last year of rival LSI Corp.
for $6.6 billion. Earlier this year, it bought Emulex Corp. for
around $600 million. In that span, its market cap has risen by more
than $25 billion as investors cheer the rapid-fire deal making.
This year, Avago's stock has jumped more than 40% including
Wednesday's gain.
Avago has been likened to health-care companies such as Valeant
Pharmaceuticals International Inc. that are based in foreign tax
jurisdictions and have become voracious acquirers.
An acquisition of Broadcom that was valued at $35 billion would
be one of the largest semiconductor takeovers ever, according to
researcher Dealogic, and would come amid a burst of deals among
such companies. So far this year, there have been more than $26
billion in semiconductor deals announced globally, not including
any tie-up between Broadcom and Avago, according to Dealogic. That
is more than double the volume in the same period last year, and
the largest year-to-date total since Dealogic started keeping
records in 1995.
In March, NXP Semiconductors NV agreed to buy Freescale
Semiconductor Ltd. in an $11.8 billion deal. Intel Corp. also is in
talks to buy Altera Corp., which has a roughly $14 billion market
value. Talks between those companies have been of-and-on and it is
conceivable they won't reach a deal, according to a person familiar
with the matter.
Meanwhile, Qualcomm Inc. has come under pressure from activist
investor Jana Partners LLC, which is pushing the chip giant to
pursue a breakup, among other actions.
"About six months ago I said in five-to-10 years, half of the
companies we know today won't exist anymore," said Mr. McGregor
soon after the NXP-Freescale deal was disclosed. "And it's pretty
solid on that track."
Mr. McGregor, who has been Broadcom's CEO for the past decade,
since November has discussed plans to react to market changes that
include slowing growth and stiffer competition. He estimated that
annual growth in the industry had slowed from double-digit
percentages to single digits and predicted that large companies
would respond by buying smaller ones.
Investors are encouraging chip makers to consolidate, frequently
pushing up the shares of companies involved in deal making--like
they have in other industries. Indeed, shares of both Broadcom and
Avago rose on news of the potential tie-up, with Broadcom up 21% to
close at $57.15 while Avago jumped nearly 8% to $141.49, both in 4
p.m. Nasdaq trading. Avago had a market value of $34 billion before
news of the talks were first disclosed by The Wall Street
Journal.
Don Clark and Maureen Farrell contributed to this article.
Write to Dana Mattioli at dana.mattioli@wsj.com, Dana Cimilluca
at dana.cimilluca@wsj.com and Shayndi Raice at
shayndi.raice@wsj.com
Access Investor Kit for Avago Technologies Ltd.
Visit
http://www.companyspotlight.com/partner?cp_code=P479&isin=SG9999006241
Access Investor Kit for Broadcom Corp.
Visit
http://www.companyspotlight.com/partner?cp_code=P479&isin=US1113201073
Subscribe to WSJ: http://online.wsj.com?mod=djnwires