Avago Technologies Ltd.’s purchase of Broadcom Corp. represents the biggest technology deal of all time. It may not stay at the top for long.
The $37 billion transaction announced Thursday eclipses the previous record-holder -- the buyout of First Data Corp. in 2007 for almost $30 billion including debt.
As the supercharged growth the technology industry once enjoyed tapers off in some places, investors are rewarding companies for pursuing acquisitions. Buyers can afford to spend: cash piles are swelling, interest rates remain low and rising stock valuations give them a strong currency to use for dealmaking.
The Broadcom takeover may be just the beginning of super-sized tech mergers, not only among semiconductor makers, but also in enterprise hardware, software and even the Internet.
“When you’ve got a market that’s expanding and growing at the rate that it has been, you have no reason to look for acquisition targets,” Chris Geier, partner-in-charge of Sikich LLP’s investment banking practice, said by phone. “This industry is becoming more mature, it’s harder to grow and the margins are getting thinner. That’s when you start to see consolidation.”
Microsoft Corp. evaluated a bid for Salesforce.com Inc. after the cloud software provider was approached by another would-be buyer, people with knowledge of the matter said. A buyout would be at least a $48 billion deal, based on Salesforce’s current market valuation.
Altera Corp. shareholder TIG Advisors is pressing the chipmaker to reconsider a bid from Intel Corp. that would have valued the company at about $14 billion after subtracting net cash. Hewlett-Packard Co. last year eyed a takeover of EMC Corp., now valued at $52 billion, according to people familiar with the matter.
“You’ve got the big, monolithic companies in search of growth, flushed with cash,” Erick Maronak, chief investment officer of Victory Capital Management Inc., said in a phone interview. “There are going to be deals. Some are going to make sense, and some are going to be the absolute illustration of: You ran out of ideas.”
Intel, Qualcomm Inc., Altera, Analog Devices Inc., Maxim Integrated Products Inc., Texas Instruments Inc., and Microchip Technology Inc. -- which agreed to acquire Micrel Inc. earlier this month -- are all considering deal opportunities, a person familiar with the matter said. Twitter Inc. has been speculated as a takeover target for companies including Google Inc.
Representatives for Microchip, Intel, Maxim Integrated, Texas Instruments and Qualcomm declined to comment. Representatives for Altera and Analog Devices didn’t respond to requests for comment.
Avago’s planned purchase of Broadcom makes 2015 a record year for semiconductor dealmaking -- and it’s still only May. The Broadcom deal may even get bigger. Qualcomm and Intel are possible counterbidders, said Srini Pajjuri, a San Francisco-based analyst at CLSA.
Qualcomm needs an acquisition to diversify beyond making chips for smartphones and Intel needs to supplement its declining PC business. Broadcom is bigger and strategically more appealing for Intel than Altera, Pajjuri said in a phone interview.
Rival suitors could offer $60 to $65 a share for Broadcom, he said. Under the terms of Avago’s deal, Broadcom investors can choose to receive $54.50 a share in cash, or stock, or a combination of the two. Broadcom closed at $56.25 on Thursday.
“I could see someone else putting their toe in the water and coming in with another offer,” Geier of Sikich said. “In the M&A world, the way we look at things, essentially everything is up for negotiation until the wire transfer hits.”
Change of Control
One impediment to big deals in tech has been the management structure. At many firms, the founder is also the chief executive officer and isn’t interested in giving up control of the company. Declining businesses can change that dynamic. It’s also a case of follow-the-leader for some companies, said Brad Gevurtz, a managing director in D.A. Davidson & Co.’s investment banking group.
“Everyone is making strategic moves on the chess board,” Gevurtz said in an interview. “Companies have to ask themselves, ‘What’s our strategic move?’”
The semiconductor industry in particular is ripe for consolidation. There are fewer companies capable of sustaining the hefty cost of production and constant innovation as growth declines. Even producers that outsource manufacturing incur expenses to design increasingly complex chips. And all face growing competition from their customers such as Apple Inc. and Samsung Electronics Co.
While rising valuations are making targets more expensive, the current low-rate environment is a help for buyers.
“There’s a good awareness at the board and management level that the cost of capital is likely to be noticeably higher two to three years from now,” Craig Ellis, an analyst at B. Riley & Co., said in a phone interview. “While you might be able to get a better valuation two to three years down the road, your cost of capital may offset that.”