Could a smaller sword make a conqueror a target to be conquered?
In the past year, Irvine chip maker Broadcom Corp. has bought more than a dozen companies and amassed more than $1 billion in annual sales. But with its shares more than 80% off their late August high of 274, industry observers are entertaining a thought unthinkable just months ago. Could a devalued Broadcom itself be an acquisition target?
“The price is cheap compared to six months ago,” said Jim Feldhan, presi-dent of chip market researcher SemiCo Research Corp. in Phoenix. “The company has good technology. Maybe Motorola would acquire it. Cisco is a company that would have the money, and Broadcom’s chips would fit well there.”
But while there are things that make Broadcom an appealing buy, there are strong factors that augur against a takeover, observers say.
The case for acquisition goes like this: The company focuses on what have been the fastest-growing chip markets,high-speed networking and wireless. It’s also a relatively small player squaring off against big rivals, including Intel Corp., Lucent Technologies Inc. and Texas Instruments Inc. Other possible suitors could be Cisco Systems Inc., a big Broadcom customer, or Motorola Inc., which owns about 5% of Broadcom by way of its General Instrument Corp. buy.
Unlike bigger rivals, Broadcom doesn’t have any old, commodity businesses. For companies seeking expansion in the lucrative communications chip business, buying Broadcom would be a way of doing so.
But even though Broadcom is more affordable,the company’s shares sit at a $50 billion discount from August,analysts still call an acquisition unlikely.
“I guess it’s possible, but that’s a big lump of money. The valuation is still high,” said Sean Lavey, an analyst with market researcher International Data Corp. With Broadcom shares trading at about 40 times present earnings, the company still is an expensive proposition.
As with all technology stocks, though, it’s unclear if Broadcom has hit its bottom yet. The company has seen its share of bad news lately and the company has said it might not grow as fast this year as it has in the past. Recent stories have suggested Broadcom’s tactic of issuing warrants for its stock as a deal sweetener for some of its customers could be inflating what seems to be high demand for the company’s products. Broadcom refutes the notion.
Even if a company saw Broadcom as worth the investment, there are other issues, observers say.
Despite its troubles, Cisco Systems still has cash for acquisitions. But acquiring Broadcom could be fraught with integration difficulties,in part because of all of Broadcom’s recent deals.
Motorola, meanwhile, is struggling with a slowdown in its business making wireless chips and has little cash. Intel has cash but could face antitrust issues in an acquisition.
Nonetheless, the strategic value of Broadcom remains, according to Lisa Pierce, an analyst with Giga Information Group.
“Motorola is directionally challenged. Intel is directionally challenged. I can see why they would want the company,” Pierce said.
While a slumping stock market has cut into Broadcom’s value, it also has hampered the buying power of any potential suitors. Intel’s stock has fallen nearly 60% from its high last August, while Motorola is off 70% from it’s high in March of last year.
But perhaps the biggest reason Broadcom would be an unlikely takeover target: Founders Henry Nicholas and Henry Samueli collectively own about 30% of the company. Known for their pride in the company they co-founded, it’s unlikely Nicholas or Samueli would be willing to sell the company, observers say.
“I would be extraordinarily surprised,” said Jeremy Bunting, a researcher at San Francisco investment bank Thomas Weisel Partners LLC. “You have to understand, these guys have a vision of being one of the biggest semiconductor companies. From the standpoint of a premium on the company, there would have to be an offer sufficient enough to attract a sale.”
Rus Tolander, an analyst with Roth Capital Partners LLC in Newport Beach suggested the company seems to be driven by its passion for the technology rather than any kind of acquisition or exit strategy. “Employees are driven by entreprenurial activities. They are a very well-managed entreprenurial company,” Tolander said of Broadcom. n
