Broadcom (BRCM: Charts, News, Offers), the second largest fabless semiconductor manufacturer in America, shook up markets on Monday when it announced a massive $3.7 billion takeover of NetLogic (NETL: Charts, News, Offers) Microsystems. The merger – Broadcom’s largest in its history – will instantly enhance Broadcom’s product portfolio, giving it access to knowledge-based processors, multi-core embedded processors and digital front-end processors, each of which is considered essential for the next generation of semiconductors. The combination is expected to allow Broadcom to reduce research and development costs as well as time between product launches. The acquisition is expected to close in the first half of fiscal 2012, and the company expects it to become earnings accretive, adding 10 cents per share on a non-GAAP basis, by the end of 2012.
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At $3.7 billion, Broadcom is paying $50 per share for NetLogic – a 57% premium over last Friday’s closing price. However, the company believes this hefty price is worth it, as it doubles the company’s market share in the building components for high-speed 3G and 4G data networks. Broadcom also has a dominant position in processors for smartphones and tablets, and dominance of the supply chain of the high speed networks themselves is extremely lucrative. It is currently estimated that only 10-15% of networks within the United States have been upgraded for 4G networks, which provide the same speed as local WiFi connections over a mobile signal. The acquisition will also help the company grow in China, since leading Chinese router manufacturers Huawei and ZTE are both customers of Broadcom and NetLogic. With the increasing popularity of smartphones and tablets produced by Apple (AAPL: Charts, News, Offers) and Google (GOOG: Charts, News, Offers), 4G networks are the inevitable future standard and a massive growth market, and Broadcom has planted itself firmly on the ground floor. Lastly, the acquisition also adds 700 patents to Broadcom’s portfolio, which give it a valuable defense against its patent-litigation hungry tech peers.
Broadcom specializes in semiconductors used in wireless and broadband communication. The company sells products for both enterprise/metropolitan networks as well as SOHO (small office, home office) networks. Broadcom provides the processors for cable modems, DSL servers, home networking devices, wireless routers, Bluetooth devices and cell phones on all major networks (GSM/CDMA/EDGE/GPRS). With the increasing integration of cable television and home Internet, Broadcom also produces processors for set top boxes, satellite receivers and video recorders. Broadcom chips are considered an industry standard, and major customers include Apple, Hewlett-Packard (HPQ: Charts, News, Offers), Motorola (now Google), IBM (IBM: Charts, News, Offers), Dell (DELL: Charts, News, Offers), Lenovo, Linksys, Logitech (LOGI: Charts, News, Offers), Nintendo, Nokia (NOK: Charts, News, Offers), TiVo (TIVO: Charts, News, Offers) and Cisco (CSCO: Charts, News, Offers). The company has built a formidable reputation based on its flagship series of high-speed encryption co-processors, which offload processor-intensive work onto a dedicated chip. This process speeds up any tasks that require speedy and secure encryption – an absolute necessity for e-commerce as well as wired and wireless Internet connections.
NetLogic is only Broadcom’s most recent prize in a long line of historical acquisitions. Over the last decade, Broadcom purchased 43 firms, increasing its annual revenue from $1.1 billion to $6.8 billion. This helped the company grow out of the shadow of securities fraud investigations that weighed heavily on the stock in recent years. Recently, the company also acquired Israel-based security software developed SC Square for $41.9 million in cash. This acquisition is expected to boost the company’s already robust security framework – an essential selling point for its chips.
Broadcom also announced a partnership with Rovi Corporation (ROVI: Charts, News, Offers), the creator of software for set-top media devices. Rovi recently unveiled that its DivX Plus Streaming technology, a lightweight codec with BluRay quality video, would be optimized for Broadcom’s System-on-a-Chip (SoC) platforms for set-top boxes and digital TVs. In addition to streaming media, Broadcom has also entered the satellite outdoor unit (ODU) to take advantage of the full sprawl of all streaming solutions – Internet, digital television and satellite networks.
For the third quarter of 2011, Broadcom has retained its forecast for revenue between $1.9-$2.0 billion. This is flatly in line with analysts’ expectations of $1.9 billion. Shares of Broadcom currently trade near the low end of its 52-week range of $30.71 to $47.39, with a forward P/E of 10.7. In addition, its PEG ratio of 0.75 suggests that the stock could rebound quickly on signs of an economic recovery, and it pays a decent 1.1% dividend – a rarity for a growing tech stock.
Other News About BRCM
Broadcom to buy chip maker NetLogic for $3.7 billion
Broadcom’s biggest purchase ever means dominance of the 4G supply chain.
Broadcom’s Steepest Chip Valuation Signaling 39% Gain for Cavium
Broadcom’s massive acquisition gets investors excited about other merger targets.
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Leo Sun is long-time market follower and finance writer. He regularly contributes to the Stock of the Day analysis.
The NETL/RMI merger was a complete failure, political issues caused talent from the NETL side to flee and the RMI side was left at the helm. The NETL CEO is notably powerless to resolve this due to RMIs holding the processor hostage, refusal to integrate NETL tech into the processor, insistence on takeover of customer relationships from the RMI side. This caused vocal complaints from tier one customers and also left a gaping hole in the software side of the business which due to RMIs political games will likely remain. The only thing of value the new NETL has is it’s TCAM monopoly. Memristor based devices will surely upset that within a product cycle or two, and customers will not want this tech to come from NETL. Customers were vocal about their desire to source TCAMs elsewhere, but there were no options. I suspect either Cisco or Huawei will go ahead with an internal memristor based TCAM design, removing NETL from the picture, significantly reducing risk of delays due to ‘integration issues’.
One paper wrt TCAMs using memristors: http://ieeexplore.ieee.org/xpl.....er=5963948