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Broadcom's CEO Steps Down and Shares Follow

Updated from Jan. 23

Despite beating expectations both on sales and guidance, Broadcom (BRCM) shares dove today as investors digested the bigger news that longtime CEO Henry Nicholas is leaving his post. His departure became effective yesterday; COO Lanny Ross will fill in while the company looks for a permanent chief.

In early afternoon trading, shares tumbled $2.74, or 16%, to $14.87.

A day after Broadcom reported earnings, Merrill Lynch slapped a sell on the stock on the basis of its high valuation and Nicholas' departure.

In a note, analyst Mark Lipacis pointed out that at Thursday's close of $17.61, the stock traded at a heady P/E ratio of 84 times his 2003 EPS estimate and 41 times his '04 estimate.

He also voiced worries about the effect of Nicholas' departure. Nicholas "is known as being a strong leader, a great motivator, and in many ways drove the intensely competitive culture of the company," wrote Lipacis. "While we believe that the current management is capable, we believe that with the departure of such a strong leader, the company will undergo a cultural change, if not a bit of a leadership vacuum."

Others called the announcement unexpected but seemed less concerned about the transition to a new CEO in the longer term.

"It's definitely a surprise. I'm sure the Street will miss him," said Ambrish Srivastava, an analyst at Gerard Klauer Mattison, which hasn't done banking with the company. "To give him credit, he's built Broadcom into a true powerhouse." One encouraging trend: The company has lately taken pains to show it's focusing more on the bottom line, Srivastava added. That includes a major cost-cutting effort that included a 16% reduction in staff, announced in November.

Pacific Growth Equities' Jim Liang said that in retrospect, Nicholas' departure might come to be seen as a "non-event," pointing out that all tech companies eventually see their founders leave. "The departure certainly does not come at a bad point for the company. They're guiding for pro forma profitability for the first time in eight quarters," he said. "My interpretation of events is that Nicholas is not leaving because the company is in trouble. That's an important point."
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