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WHAT happens to the chip industry’s ultimate deal maker now that his ultimate deal is dead?
Years of consolidation have left Broadcom Ltd. AVGO 2.75% Chief Executive Hock Tan surveying a semiconductor landscape with few targets that rival the heft of the one he just failed to buy, Qualcomm Inc. QCOM -0.38% That bid, which President Donald Trump blocked Monday, represented the biggest tech deal ever and would have more than doubled Broadcom’s revenue.
Not many companies remain that fit Mr. Tan’s exacting specifications: those with market-leading products with limited competition, opportunities to cut costs, and with something to offer Broadcom’s two big customer groups, handset makers and data-center operators.
“There are only so many elephants out there,” said Chris Caso, an analyst with Raymond James. “Now one is gone.”
Broadcom finance chief Thomas Krause on a conference call with investors Thursday confirmed the company was still looking, though. “We do see potential targets that are consistent” with the company’s business model and would drive greater returns than buying back shares, he said, adding that the company likely would fund them with available cash.
Broadcom on Thursday reported first-quarter sales rose to $5.33 billion, driven largely by 88% rise in wireless sales including smartphone chips for functions such as radio filtering, Bluetooth and Wi-Fi. Profit surged to $6.57 billion from $252 million the previous year, which included the impact of discontinued operations.
The company said it expected to complete its plan to change its domicile to the U.S. from Singapore by market close on April 4. The move could help it with future acquisitions by avoiding the sort of national security concerns that derailed its effort to acquire San Diego-based Qualcomm.
Broadcom shares were down 1.22% to $264.50 in after-hours trading after gaining 2.75% in normal trading.
Amit Daryanani, an analyst at RBC Capital Markets, recently combed the Standard & Poor’s 500-stock index for companies with valuations between $10 billion and $120 billion, as well as financial features such as margins and expenses that might appeal to Mr. Tan. Of roughly 18 chip companies that made the analyst’s initial cut, four looked like a potential fit, though each had aspects that might not appeal to Mr. Tan.
Xilinx Inc., with a market value of just under $20 billion, is one possible target, according to analysts including Mr. Daryanani.
he Silicon Valley company, which makes programmable chips that can be used for purposes including artificial intelligence, is a market leader with characteristics Mr. Tan seeks. It sells its products for far more than they cost to make—a 70% gross margin, according to Mr. Daryanani—yet expenses exceed the level Broadcom typically thinks is reasonable, seen in the company’s 29% pretax profit margin. That gap leaves Mr. Tan room to wring out further profits.
Some analysts said another Silicon Valley firm, Maxim Integrated Products Inc., valued at $13.5 billion, offers similar opportunities. It makes inexpensive, general-purpose chips for markets including smartphones. Its products would extend Broadcom’s reach in the high-margin world of analog chips, which differ in fundamental ways from digital chips.
However, Maxim’s customers are in automotive, industrial and other areas outside Broadcom’s base, so they don’t fit neatly into Mr. Tan’s strategy, according to Srini Pajjuri of Macquarie Capital (USA) Inc.
Spokeswomen for Xilinx and Maxim declined to comment.
Adding either of those potential targets would increase Broadcom’s adjusted per-share earnings by only a few percent, compared with the 20% pop Qualcomm would have contributed, Mr. Pajjuri said. Moreover, he said, they wouldn’t come cheaply based on current stock prices.
Xilinx trades at 27 and Maxim at 23 times their forward per-share earnings, according to Factset. Qualcomm traded at around 14.5 times earnings in November, when Mr. Tan made his initial bid.
Nobody, however, expects Mr. Tan to stop looking. The $117 billion bid for Qualcomm, which played out over four months before it ultimately failed, followed a string of successful deals over the past decade that built Broadcom into a giant with a market value of $107 billion.
“Acquisitions are part of Broadcom’s DNA, and Hock Tan will always be hunting for businesses that fit his criteria,” Mr. Caso said.
But Broadcom’s revenue, profit and cash-flow growth have been so healthy lately, that its chief “doesn’t need to be in a hurry,” Mr. Caso said. In Broadcom’s fiscal year that ended in October, revenue was up 33%, profit by 39% and free cash flow by 58%, according to S&P Global Market Intelligence.
With cash flow growing faster than at its semiconductor peers. Broadcom could raise its dividend or increase per-share earnings by buying back shares —moves that could keep shareholders happy until Mr. Tan finds his next target.
Broadcom signaled as much less than a year before launching its Qualcomm bid. While the company would be on the lookout for “opportunistic acquisitions,” finance chief Thomas Krause said in a December 2016 earnings call, “we have reached the point where it makes most sense to return a more meaningful portion of our cash flow to shareholders.”
Some investors like that idea—with or without further acquisitions.
“If they do what they said they would and return cash, that would make this an attractive investment,” said Anupam Bose, a partner at Clough Capital Partners LP.
Risks associated with the potential merger weighed on Broadcom’s share price, and it lost around 17% between Nov. 6, when Mr. Tan submitted his initial bid, and Feb. 8, when Qualcomm rejected a revised, higher offer. The share price since then has been on the rise, up about 14% as of Wednesday’s close. For the year, is up about 15%. - WSJ
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