NEW YORK (TheStreet) -- Consolidation seems to be the new strategy among the semiconductor companies. It makes sense given how companies with tons of cash and little growth can immediately look revived with one key deal. But selling or buying just for the sake of a deal makes no sense, especially when growth of the target company has been no issue.
If you believe the rumors, Avago Technologies (AVGO) is shopping itself around. Investors and traders pounced on the noise, sending Avago stock up more than 4%, before settling with a 3% gain at $126.94. Even more surprising, shares of the three companies Avago is reportedly speaking to about a deal also spiked by an average of almost 4%.
We've seen this happen before. Investors get suckered into a situation of "buy the rumor, sell the news" -- only to be left with no more buyers when the news turns out to be a dud. In that case, it's all hype. Avago, headquartered in Singapore, doesn't need a deal. The company has quickly built itself into one of the premier wireless technology specialists on the market, growing earnings and revenue in 2014 at rates of 52% and 70%, respectively.
Avago supplies chips to Apple (AAPL) for iPhones and iPads. Apple accounts for more than 10% of Avago's annual sales, meaning, as Apple goes so does Avago. And with Apple crushing iPhone unit sale estimates in two consecutive quarters, Avago, whose shares are up more than 26% year to date, has latched on to the right coattail. Not to mention, analysts expect Apple to maintain its momentum throughout 2015, boding well for Avago stock.
So it's a little surprising, according to reports, that Avago make overtures to Maxim Integrated Products (MXIM), Xilinx (XLNX) and Renesas Electronics (RNECY). But here's the thing, neither of these companies appear to be in any position to afford Avago, which has a market cap of more than $32 billion as of Thursday's close of $126.94 per share.
Avago wants to diversify, sure. But why would Avago talk to these three, which -- combined -- has a market cap of $35 billion. Xilinx is valued at $11.76 billion, or roughly one-third of Avago as of Thursday's close of $44.99. Xilinx has a net cash position of $1.7 billion as of the most recent quarter. How can it afford Avago, especially with both its full-year revenue and earnings are projected to decline this year by 4.5% and 10%, respectively?
Maxim, whose market cap of $9.6 and net debt position of $600 million looks even less likely. Its earnings are projected to decline 8% for the full-year ending in June, while revenue is projected to fall roughly 6%. The better of the three candidates would be Renesas Electronics, whose market cap is at almost $14 billion. But that's still less than half of Avago.
The market is often accused of being rigged. And with shares of all four companies spiking on unconfirmed reports, strict due diligence is needed to protect positions. For that matter, that Avago is rumored to want to sell to companies that couldn't afford it makes the reports even less credible. And investors should be careful.