President Trump's order blocking Broadcom Ltd.'s (AVGO) hostile bid for Qualcomm Inc. (QCOM) late Monday could actually spur more consolidation in the semiconductor industry, as Broadcom squares off against acquisitive rival Intel Corp. (INTC) for targets.
"The fact that we actually saw Trump block Broadcom's acquisition of Qualcomm positions the industry better for more consolidation," CFRA Research analyst Angelo Zino said. "It frees Broadcom up to potentially do a number of deals rather than having to digest a very large Qualcomm acquisition that could have taken a couple of years."
Shares of Broadcom gained 0.25% to $263.49 on Tuesday afternoon, while Qualcomm shares were down 4.5% to $59.99.
Although Broadcom may now be freed to make other acquisitions, the question of what the government will allow it to buy looms. The company is in the process of changing its domicile from Singapore to the U.S., but still faced opposition to its proposed deal from the Committee on Foreign Investment in the U.S. (Cfius).
"At this point, it is all speculation," said one analyst regarding the ability of Broadcom to make acquisitions. "Where is the line?"
One thing seems to be clear -- semiconductor firms are off-limits for Chinese buyers. The Trump administration previously blocked Canyon Bridge Capital Partners LLP's $1.3 billion plan to acquire Lattice Semiconductor Corp. (LSCC) in September 2017, as well as and Hubei Xinyan Equity Investment Partnership's $580 million purchase of Xcerra Corp. (XCRA) in February 2018.
In the case of the Lattice deal, the White House cited national security concerns for its decision. With Xcerra, the target withdrew the application because it said Cfius would not approve the deal, but there was no official explanation given for why.
European buyers have not been welcome, either. In February 2017, Cfius prevented German company Infineon Technologies AG from buying Cree Inc.'s (CREE) Wolfspeed Power & RF division for $850 million.
Despite the government pushback on Qualcomm, Drexel Hamilton LLC analyst Cody Acree said that Broadcom CEO Hock Tan has a venture capitalist's mindset and would continue to hunt for acquisitions.
"The M&A route is not going to change," he said. "At the same time when you've been shut down on this level, you're going to have to be pretty careful where you go from here."
Finding meaningful targets also becomes more difficult after the Trump order.
With a $114 billion market cap and $21 billion in projected 2018 sales, Broadcom needs to acquire sizable businesses to move the needle. Tan also likes to acquire companies that he believes are undervalued, such as Qualcomm. Of course, strategic fit with Broadcom's business is also important.
"You're starting to add a long laundry list of what it takes to make these acquisitions successful," Acree said. "On top of that, you add national security issues."
Xilinx Inc. (XLNX) , which makes programmable logic processors and competes with Intel's Altera, is often mentioned as a target for Broadcom, but could encounter regulatory issues.
"These programmable logic devices go into a lot of military and aerospace programs," Acree said. "You may run into the exact same kind of problem" Broadcom faced regarding the purchase of Department of Defense partner Qualcomm.
In the case of Qualcomm, CFRA's Zino suggested that Tan's plans to potentially shut down the IP licensing business and break off other pieces of the business may have been larger concerns than its Singapore domicile.
"Qualcomm has been an enormous innovator for the semiconductor industry," Zino said. "The last thing the government wanted was to see a weakened Qualcomm fall behind China in the development of 5G."
While Trump rejected the bid for Qualcomm, his administration did allow Broadcom to purchase chipmaker Brocade for $5.9 billion in November 2017. Zino suggested that Broadcom could make additional acquisitions.
As semiconductor consolidation plays out, Zino suggested that chip companies such as Cypress Semiconductor Corp. (CY) , Integrated Device Technology Inc. (IDTI) , Maxim Integrated Products Inc. (MXIM) , Mellanox Technologies Ltd. (MLNX) , ON Semiconductor Corp. (ON) and Semtech Corp. (SMTC) could become targets for Broadcom, Intel or others.
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