 |
| Clermont Meridian Trading Reviews Avago's $37 Billion Purchase of Broadcom |
Avago Technologies Ltd agreed to buy Broadcom Corp for $37 billion in the largest chipmaker merger ever. The union transforms a lesser-known corporation run by a ruthless dealmaker into one of the industry's most significant players, according to the Clermont Meridian Trading assessment.
Avago, which serves the wireless and industrial markets, is offering $17 billion in cash and $20 billion in Avago stock to Broadcom stockholders. Broadcom is well recognized for its connection chips, which can be found in Apple Inc AAPL.O and Samsung Electronics Co Ltd devices.
Since inheriting the leadership nine years ago, Avago Chief Executive Hock Tan has evolved the company from a modest chipmaker to a $36 billion company through acquisitions. Tan, a seasoned dealmaker, has pared down Avago's portfolio by selling off assets while investing in faster-growing regions.
The merged business, to be known as Broadcom and based in Singapore, will be the third-largest semiconductor maker in the United States by revenue, behind Intel Corp and Qualcomm Inc. Clermont Meridian Trading analysts believe the merger is the industry's second megadeal this year and is unlikely to be the last.
The $37 billion price is a 28% premium over Broadcom's market value of $28.85 billion as of Tuesday's closing before the Wall Street Journal reported that the companies were in negotiations. Following NXP Semiconductors' NXPI.O $11.8 billion offer to buy Freescale Semiconductor Ltd FSL.N in March, the Avago-Broadcom agreement was announced. According to those familiar with the situation, Avago had also made a proposal for Freescale.
"Intel has also been in talks to buy chipmaker Altera Corp ALTR.O in a deal that might top $10 billion," Clermont Meridian Trading’s Senior VP of Equity Trading, George Willis, said in a statement about the industry. "Avago's biggest acquisition until Thursday was chipmaker LSI Corp, which it paid $6.6 billion for last year. Tan's strategy has been to hunt for potential targets that may not be the best strategic fit but have the ability to save money and add value," he added.
According to sources familiar with the case who are not permitted to speak publicly about it, Avago and Broadcom initially discussed a possible merger in October 2014 but could not agree on a price. When Avago approached Broadcom with larger proposals in April, the talks heated up again, and the two continued to negotiate until a deal was reached.
The combination will increase the companies' bargaining power with manufacturers. Broadcom, situated in Irvine, California, has been battling to develop as the mobile semiconductor industry becomes more competitive. Last year, the company's revenue climbed by only 1.5%.
On Thursday, Broadcom's stock fell 1.5% to $56.25, while Avago's fell 0.62% to $142.38. The firms said they intend to complete the transaction by the end of the first quarter of 2016, saving $750 million in the process. According to one of the unnamed sources, the transaction carries a $1 billion breakup fee.
According to the companies, the new Broadcom would generate $15 billion in yearly revenue and have a market value of $77 billion. Shareholders of Broadcom will own roughly 32% of the combined business, and they would also be able to choose from various cash and stock combinations.
Avago, which is headquartered in San Jose, California, said it planned to cover the cash side of the transaction with funds from the combined firm and new debt totaling $9 billion.
Deutsche Bank, Bank of America, Barclays, Citigroup, and Credit Suisse advised Avago. JPMorgan Chase JPM.N advised Broadcom, while Evercore served as the Special Committee of the Board's financial adviser.
Broadcom's legal counsel is Skadden, Arps, Slate, Meagher & Flom LLP. Centerview and Morrison & Forester advised Broadcom co-founder Henry Nicholas.