Will Broadcom Corp.’s reversal of fortune on Wall Street crimp the chip maker’s two-year buying binge?
It didn’t seem to affect the Irvine-based company last week, as Broadcom announced plans to buy Israel’s VisionTech Ltd. for $677 million in stock.
But Broadcom’s beaten-down shares could become a factor in its acquisition strategy, which many have likened to that of shopping king Cisco Systems Inc. Last week, Broadcom shares were trading at about 100, down from 250 in late August, on fears of slowing sales to networking gear and cable-box makers.
On Nov. 24, Broadcom completed its buy of Britain’s Element 14 Inc. pretty much as scheduled. But its pending pickup of Santa Clara-based SiByte Inc. could be complicated by Broadcom’s reduced value on Wall Street.
Leo A. Joseph, vice president and co-founder of SiByte, said company executives are considering asking Broadcom for more shares to offset the lowered value of the deal. But Joseph also made clear that the acquisition is still on, and he expects it to close by the end of the year.
“The way we look at it, the whole sector is going through a downturn,” he said. “It doesn’t affect the deal.”
On Nov. 3, Broadcom agreed to issue 9.3 million shares of new stock (including 3.7 million tied to performance goals) to acquire SiByte. When the deal was announced, it was valued at $2.07 billion. As of last week, it was worth about $930 million for SiByte’s shareholders.
A Broadcom official declined to comment on whether it would increase the number of shares for SiByte. The deal has until Jan. 5 to close.
The 7.96 million shares offered last week for VisionTech is near the number offered for SiByte. When the SiByte deal was announced, Broadcom Chief Executive Henry “Nick” Nicholas called it the “most significant” acquisition ever for Broadcom. The reason is that SiByte co-founder Dan Dobberpuhl is considered a guru of microprocessors, having developed the Alpha, a long-time standard in the industry.
Nicholas told reporters last week that Broadcom plans to continue buying companies. In the past two years, it has acquired or outlined plans to buy 17 companies.
Broadcom’s acquisition of Element 14, a 68-employee developer of digital subscriber line chipsets, software and communications processors, came in at about half the value it had when it was announced.
Back on Oct. 4, the purchase price was 2.65 million shares, or about $641 million, with Broadcom’s stock trading at about 242 then. When the deal closed Nov. 24, it came in at 2.74 million shares. But even with an additional 90,000 shares,or $10.5 million,the deal was worth just $321 million based on Broadcom’s 117 share price on the day the deal closed.
In the past five weeks alone, the company has lost more than $30 billion in market capitalization,currency that could have been dangled in front of prospective partners.
“It does hurt their acquisition strategy,” said Thomas O. Gephart, founder of Irvine-based Ventana Global Ltd.
Gephart’s venture capital firm funded El Segundo-based Innovent System Inc., which earlier this year was bought by Broadcom for $457 million in stock.
Broadcom’s strategy of using its stock as currency to grow is seen as a quick way to become dominant in an industry.
“Why spend two or three years and tens of millions if you can buy it?” Gephart said. “You can own the talent and it also affects a lot of sub-elements of your company.”
While Broadcom is likely to pursue more deals, the risk is that the stock can become too diluted and diminish the company’s value.
If Broadcom offers too many shares to companies being acquired, its stock gets diluted much faster. But if it doesn’t offer enough, the deal might not go through.
The task for Broadcom executives, Gephart said, is “to argue that other companies are worth less than what their executives thought they were.”
On the other hand, executives looking for exit strategies have limited options. The market for initial public offerings is weak. If executives seek a floor on the stock’s price in a deal, it’s considered a taxable transaction. And while Broadcom’s stock is down, so are other technology stocks. Being bought by Broadcom still has appeal, observers say.
Broadcom remains Wall Street’s favorite Orange County company. Its market cap stood at about $24 billion last week, which is twice that of the next most valuable OC company, Allergan Inc., which has a market cap of $12 billion.
Nonetheless, analysts aren’t expecting Broadcom’s stock to soar again any time soon.
In early November, W.R. Hambrecht analyst Jim Liang downgraded the stock. A big blow came last week when Salomon Smith Barney slashed its target projection from 300 to 200. Broadcom’s stock fell 15% within hours.
Out of the 20 analysts covering the company, seven now rate it a strong buy, down from eight a month ago, according to Zacks Investment Research Inc. Another 13 analysts call it a moderate buy, while one analyst is neutral.
The market is bearish on Broadcom for a variety of reasons. One is the high level of inventory reported by Cisco Systems, one of Broadcom’s biggest customers. And AT & T; Corp. recently said it wouldn’t be accepting more cable equipment deliveries this year. About half of Broadcom’s chip sales are for cable boxes and modems. Added to that is a recent weakening in the demand for wireless communications chips, another big sector for Broadcom.
“As recently as two weeks ago, our supply chain sources were adamant that demand was strong for wireless communications (chips),” said the report by Salomon Smith Barney analyst Clark Westmont.
Even so, there are many who believe Broadcom is well positioned in some of the fastest-growth markets in technology.
Ventana’s Gephart calls Broadcom “a real technology company.”
“They have the future locked up inside their house,” he said. n
