Watch out Qualcomm, Avago/Broadcom is coming for you. This is the clear message from the agreed $37bn deal which will see Avago Technologies acquire Broadcom.
This has the potential to be the largest and most significant merger in the semiconductor industry since the hiatus of the credit-crunch in 2008/9, perhaps of all-time.
It is no surprise it addresses the communications IC market. Thanks to mobile and now IoT, the communications sector has taken over from desktop computing as the world’s dominant semiconductor market.
What is more surprising is that it is Singapore-based Avago Technologies which is proposing to buy Broadcom. But don’t be fooled by Avago’s apparent ‘lack of glamour’. This is a successful company which knows about acquisitions.
Avago’s revenues are less than Broadcom’s. Perhaps more surprising is that while the Broadcom name is widely known around the business world, Avago has slipped under the radar of most of the business watchers.
But it is the combination of Avago’s secret pedigree with Broadcom’s secret sauce which could be Qualcomm’s undoing.
A merged Avago-Broadcom has only an 8% share of wireless communications IC market, dominated by Qualcomm, with Samsung Electronics and MediaTek following behind.
But there is more to this deal than mobile phone chipsets. It changes the communications chip market in toto.
Qualcomm has had challengers in the wireless chipset market before – TI, ST-Ericsson, MediaTek and of course the ever-present Samsung – but the Avago-Broadcom merger will worry Qualcomm.
The reason is the merged company’s strength in the wireline market as well as wireless. This gives it a strongly growing base to go after Qualcomm’s over-balanced wireless business.
A merged Avago-Broadcom will have 40% of the wired communications IC market, excluding memory.
According to market watcher IHS, its revenues for this category in 2014 were more than five times larger than the next largest supplier, Intel. And the business is growing strongly.
When combined with wireless this jumps the merged Avago-Broadcom to number two in the total communications ICs market. With an overall market share of 14% it is just behind Qualcomm and ahead of Samsung Electronics.
This is why the merged $77bn Avago-Broadcom is a serious challenger to Qualcomm.
According to IHS, the wired communications market is likely you grow faster than the wireless chip market in the next five years.
The five-year compound annual growth rate (CAGR) for wired communications is 7%, leading all other market segments. On the other hand, semiconductors used in wireless communications products is projected to go through a period of weak growth at only 2% CAGR over the next five years, says IHS.
This can only strengthen a merged Avago-Broadcom’s challenge to Qualcomm.
On top of this the merged company can make big cost savings on its supply chains in Asia, the most important communications chip market and a market where both have strong businesses.
Avago knows the power of acquisitions to win market share. Last year it acquired LSI to build its position in the storage chip market.
The combined revenues of the two companies in 2014 exceeds $14bn making it the third-largest semiconductor supplier, trailing only Intel and Qualcomm, if memory integrated-circuit (IC) revenues are excluded.
“The complementary product portfolios of the two companies move them into a powerful position, in both the communications IC market and the storage IC market,” said Dale Ford, vice president and chief analyst for IHS Technology.
The mergers increase the company’s strength in the communications and storage categories. Outside of these two areas, Broadcom has a much smaller presence in consumer electronics and industrial electronics and almost no revenue from other data processing and automotive electronics.
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