Semiconductor giant Broadcom Ltd. (AVGO) is still on the M&A hunt after withdrawing its hostile takeover bid for Qualcomm Inc. (QCOM) in the face of opposition on national security grounds from President Trump. "We don't see this week's events putting any constraints on our ability to pursue acquisitions more broadly going forward," is what Broadcom CFO Thomas Krause said on a conference call with analysts, per Barron's.
We mention in this story 9 possible Broadcom takeover targets. For starters, Fortune.com cites six candidates from a report by Angelo Zino, an analyst at CFRA Research: 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). Barron's earlier cited potential targets based on an RBC Capital report, including these three: Xilinx Inc. (XLNX), Analog Devices Inc. (ADI), and Marvell Technology Group Ltd. (MRVL). That may be just the short list. RBC says there are 19 companies with market caps of more than $5 billion that may be a fit for Broadcom.
Small Enough to Digest
With a current market capitalization of about $110 billion, Broadcom is big enough to absorb any, and probably several, of these rivals. The market caps of those potential targets are, also according to Yahoo Finance as of 1pm Friday:
- Cypress: $6.58 billion
- Integrated Device: $4.36 billion
- Maxim: $17.6 billion
- Mellanox: $3.86 billion
- ON Semiconductor: $11.0 billion
- Semtech: $2.68 billion
- Xilinx; $19.4 billion
- Analog Devices: $34.9 billion
- Marvell: $11.58 billion
The combined market cap of all nine companies listed above is $112 billion, just marginally above that for Broadcom. Despite soaring to record highs, semiconductor stocks remain relatively cheap, compared both to technology stocks in general and to the broader market. Brisk growth in revenues and earnings is being driven by the increasing use of chips in a growing range of both consumer and industrial products. (For more, see also: Chip Stocks At Record Highs Still a Bargain.)
"We do see potential targets that are consistent with our proven business model and also can drive returns well in excess of what we otherwise achieve buying our own stock and paying down debt," is what Broadcom CFO Krause also told analysts on the call quoted by Barron's. He added that "our future acquisitions are much more likely to be funded with cash available on our balance sheet and without the need to flex the balance sheet much beyond our current financial policy of 2x net leverage." Broadcom's most recent fiscal year ended on October 31, at which time the company had $11.2 billion of cash, per financials reported by Barron's.
Krause noted, per Barron's, that the semiconductor industry is mature and consolidating. According to tech fund manager Paul Wick, during Barron's investment roundtable in January, consolidation among chipmakers has produced "significant cost synergies." Wick also observed, "Semiconductors are an inexpensive way to play a lot of the best secular trends in technology." (For more, see also: 5 Stocks To Ride The Hottest Tech Trends.)
Indeed, Broadcom has grown through "savvy acquisitions," analysts cited by Fortune say, and they expect the company to continue with this strategy. In a similar vein, analyst Zino of CFRA expects Broadcom "to remain a key beneficiary of industry consolidation and we think it should focus on increasing its exposure within the auto and industrial end-markets," as quoted by Fortune. Among his six picks for acquisition by Broadcom, automotive and industrial applications are recurring themes in their company descriptions, as provided by Barron's.