With the Trump Administration having put an end to Broadcom's (AVGO) - Get Broadcom Inc. Report pursuit of Qualcomm (QCOM) - Get QUALCOMM Incorporated Report , it might be just a matter of time before Broadcom turns its sights on another large-cap chipmaker.
Intel (INTC) - Get Intel Corporation (INTC) Report , which was reportedly open to bidding for Broadcom if it looked like Broadcom's Qualcomm bid (it was just abandoned) would succeed, might also be willing to pursue a major deal. However, its M&A priorities appear to be a lot different than Broadcom's.
After kicking off its M&A binge a few years ago with a series of sub-$10 billion deals, Broadcom is clearly thinking big. Before pursuing a Qualcomm bid featuring a $140 billion price tag after accounting for Qualcomm's pending deal to buy NXP Semiconductors (NXPI) - Get NXP Semiconductors NV Report , the company formerly known as Avago struck a $37 billion deal in mid-2015 to buy Broadcom (it took the Broadcom name post-closing), and reportedly bid for Toshiba's flash memory unit last year (it sold for $18 billion to a Bain Capital-led group). One relatively small deal, the $5.5 billion purchase of storage networking leader Brocade Communications, was closed last fall.
Also: Shortly before the Avago-Broadcom deal was inked, Reuters reported Avago had shown interest in leading FPGA developer Xilinx (XLNX) - Get Xilinx, Inc. (XLNX) Report , top-3 microcontroller (MCU) vendor Renesas and major analog/mixed-signal chipmaker Maxim Integrated (MXIM) - Get Maxim Integrated Products, Inc. (MXIM) Report . The company was also said to have shown interest in MCU maker Freescale Semiconductor before it chose to sell to NXP. Xilinx and Renesas are respectively worth over $19 billion apiece today, and Maxim is worth $13.6 billion.
Though some of the firms it has eyed possess major product lines that complement existing Broadcom mobile, data center and/or storage franchises, the diversity of its targets suggests Broadcom views chip M&A as a good in and of itself, at least provided the price is right. The company seems to be operating under the mindset that it has nailed the formula for extracting major cost and -- with the help of hardball negotiating tactics -- pricing synergies from chip and hardware franchises servicing major OEMs and cloud giants. Any product-line synergies it gets along the way are icing on the cake.
Given this, along with the fact that Broadcom now sports a $100 billion-plus market cap, there's a good chance that the company will look for new $10 billion-plus targets to buy. However, in the wake of a giant chip stock rally, elevated valuations could act as a deterrent in many cases.
For example, while Xilinx's size and complementary data center and networking/telecom offerings might appeal to Broadcom, the company sports an enterprise value (market cap minus net cash) equal to 21 times its expected fiscal 2019 (ends in March 2019) free cash flow (FCF). Likewise, Maxim is valued at 19 times its expected fiscal 2019 (ends in June) FCF.
Maxim rival Analog Devices (ADI) - Get Analog Devices, Inc. Report also trades for 19 times its expected fiscal 2019 (ends in October) FCF. That said, if Broadcom is intent on getting a lot bigger, it's tough to think of a more plausible target than ADI, which sports a $41.6 billion enterprise value.
Renesas is a little cheaper: Its enterprise value is equal to 17 times its expected 2019 FCF. So is analog/mixed-signal firm ON Semiconductor (ON) - Get ON Semiconductor Corporation Report , whose $13 billion EV is equal to 15 times its expected 2019 FCF. Deals for either Renesas or ON would carry the benefit of increasing Broadcom's currently-limited exposure to a growing automotive chip market.
If Broadcom is open to snapping up smaller targets, there are plenty of possibilities. iPhone/iPad audio codec chip supplier Cirrus Logic (CRUS) - Get Cirrus Logic, Inc. Report , which sports a $2.6 billion enterprise value, trades for just 11 times its expected fiscal 2019 EPS. And while the fact that Cirrus gets well over half its revenue from Apple (AAPL) - Get Apple Inc. (AAPL) Report might scare away other suitors, Broadcom could feel confident enough in its long-term relationship with Apple to make a bid.
Broadcom could also go after an optical component/module vendor with strong cloud data center exposure, such as Finisar (FNSR) - Get Finisar Corporation Report ($2.3 billion market cap, also an Apple supplier). Or it could target a smaller MCU vendor such as Cypress Semiconductor (CY) - Get Cypress Semiconductor Corporation Report ($6.5 billion market cap). Cypress would grow Broadcom's auto exposure and let it undo one of is few M&A-related mistakes: The $550 million sale of its automotive/IoT connectivity chip business, which has been booming under Cypress' oversight.
Buying an MCU vendor might also appeal to Intel, albeit for different reasons. The chip giant, which the Wall Street Journal reported is open to pursuing "smaller acquisitions" if it decides (as is now quite likely) that it won't bid for Broadcom, is still hungry to lower its PC CPU dependence. With ARM-architecture MCUs (rather than x86-architecture CPUs such as Intel's) remaining the most popular processing option for many automotive subsystems and IoT devices, Intel could decide that it makes sense to expand into this space via M&A.
Intel could also kick the tires on buying a major RF chipmaker such as Skyworks (SWKS) - Get Skyworks Solutions, Inc. Report or Qorvo (QRVO) - Get Qorvo, Inc. Report (Broadcom probably can't do the same for antitrust reasons), which respectively have $20.4 billion and $10.7 billion market caps. The companies carry reasonable valuations, benefit from IoT device growth and steady increases in smartphone RF complexity and would complement Intel's 4G/5G modem business. Qualcomm has argued its ability to offer an end-to-end 5G solution that covers both modems and RF front ends will give it a performance edge, and Intel might feel the same way.
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