Contact: Mark Fontecchio
Go big or go home has been the mantra in the semiconductor business of late, and there is no better example than Avago Technologies’ $37bn reach for Broadcom today. The purchase price is more than double the next-biggest chip deal that we’ve tracked, with the combined company becoming one of the largest global suppliers of semiconductors.
With four transactions for nearly $45bn, Singapore-based Avago has become the most active acquirer in the semiconductor sector since 2013 in volume and value, according to 451 Research’s M&A KnowledgeBase. Its two largest – for Broadcom today and LSI in 2013 – have diversified Avago’s chip portfolio with storage and networking semiconductors so it is less reliant on the volatile wireless business. They have also followed the pattern of consolidation that has infected the entire semiconductor market, with buyers seeking big targets with opportunities to cut operating expenses. To wit: Broadcom brings in about 30% more sales than Avago, but its profit margin is 14 percentage points lower. Avago wants to reach a 40% margin on the combined entity, which is higher than either company alone.
The 39.1x multiple of Broadcom’s enterprise value over trailing EBITDA is almost three times the median EBITDA multiple on billion-dollar chip deals, according to the KnowledgeBase. Broadcom’s continued growing revenue and the paucity of remaining large semiconductors targets are two main factors in that higher-than-usual valuation. The deal includes $17bn in cash and the rest in Avago stock, with Broadcom shareholders owning about 32% of the combined business. Avago will fund the acquisition with $8bn in cash, $9bn in new debt and 140 million Avago shares worth $20bn. The transaction is expected to close early next year. Both boards have approved the deal, but it’s still subject to approval by regulators and shareholders.