Avago's Pedigree Hints at More Deals After Broadcom

NEW YORK (TheStreet) -- Even by the standards of the always-consolidating semiconductor industry, Avago Technologies (AVGO) stands out due to the rapidity with which it likes to scoop up its rivals and competitors.

The latest example of that is Avago's recent announcement that it will acquire communications chipmaker Broadcom (BRCM) in a deal worth $37 billion -- $17 billion in cash and $20 billion in stock -- that will close in the first quarter of 2016, if all goes according to plan.

The Broadcom deal comes on the heels of what has been a busy time for Avago.

In May 2014, the semiconductor giant paid $6.6 billion for LSI, and in August of last year, Avago spent $309 million for fabless semiconductor company PLX Technology. Avago then acquired fiber channel storage technology company Emulex for $606 million in February of this year.

Christopher Rolland, an analyst with FBR, said Avago's latest deal sums up what the chipmaker is all about.

"Avago is a consolidator of semiconductor companies," Rolland said. "They have heavy mobile [industry] exposure, so Broadcom's connectivity business fits well with them."

It's a business that also bolsters Avago's position among the leading semiconductor companies worldwide. Avago and Broadcom together accounted for $13.4 billion in sales in 2014, which would make the combined company the sixth-largest chipmaker in terms revenue behind Intel (INTC), Samsung (SSNLF), Qualcomm  (QCOM), Hynix (HXSCF) and Micron Technology (MU), according to tech research firm IDC. The combined Avago-Broadcom position jumps to No. 3 overall when the memory chipmakers Samsung, Hynix and Micron are taken out of the equation.

Because of Avago's recent acquisition track record, some analysts say it shouldn't be a surprise if the company makes more such deals under the right circumstances.

"Avago has demonstrated its focus and intent to expand while broadening its technologies and markets and entrenching its position within its core customer base across the cloud, data center and mobile handset markets," said IDC analysts Abhi Dugar and Mario Morales, in a report on the company and its penchant for acquisitions. "And now even in consumer where Broadcom is a dominant player."

Sergis Mushell, a semiconductor industry analyst with Gartner, said that the key to Avago's recent acquisitions is that the company is building a data-center strategy. Muscle said that with LSI, Avago acquired its storage component, added switching technology with PLX and brought in networking card technology when it bought Emulex.

"That leaves peripheral devices like power management and timing," Mushell said. "Chips that are relatively inexpensive."

Dugar and Morales of IDC said that if Avago is looking for more deals, it will likely consider companies with strong gross margins that may reach the 60% mark of Avago and Broadcom's long-term target. The IDC analysts said that, aside from Intel, "analog companies such as Linear [Technology] (LLTC), Maxim [Integrated] (MXIM) and Texas Instruments (TXN) enjoy that strong profile today, which makes those companies prime for the next wave [of acquisitions]."

Pollard, of FBR, added that when it comes to Avago's acquisition tear, most has been driven by financial benefits and not necessarily  strategic reasons. "They are looking for higher quality, accretive ideas that typically diversify their business," Rolland said. "The target list is many."  

Even though Avago made a splash with its plans to acquire Broadcom, there remains a possibility that Avago could have to go shopping for an alternate deal should some other company swoop in with a better offer for Broadcom. Most analysts say that if a bidding war were to ensue, the most likely rival would be Intel, but that the chances of such an event occurring remain slim.

"[Intel] has already tried to buy Broadcom's connectivity business and has also shown prior remorse for not buying Broadcom in prior years," said Timothy Arcuri, of Cowen. "However, Broadcom's products do not fit entirely neatly into Intel's 'Rolls-Royce' manufacturing infrastructure." Arcuri also noted that Intel is likely too busy with its own $16.7 billion purchase of Altera (ALTR) to take on another major acquisition at the present time.

Avago didn't immediately return a request for comment for this story.

Disclosure: Rex Crum doesn't own shares of any of the companies mentioned in this story.

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