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New Broadcom bares initial job cuts

Posted: 29 May 2015     Print Version  Bookmark and Share

Keywords:M&A  iPhones  Ethernet  Broadcom 

Avago Technologies has just created the semiconductor industry's biggest proposed merger to date. The company recently bid $37 billion ($17 billion in cash and $20 billion in stock) for Broadcom, which then paves the way for the world's sixth biggest chip vendor. With streamlining operations that include layoffs in engineering staff, the new entity is expected to cut at least $750 million in annual costs within 18 months.

"This is the latest and, by far, the largest merger in the semiconductor industry, as major players continue to move in an aggressive way to establish position and profitability in key segments of the industry," said Dale Ford, vice president and chief analyst for IHS Technology. "Investors have responded favourably to the announcement, with promised bottom-line benefits derived from realised cost savings."

Henry Samueli, Broadcom's co-founder and chief technologist, will become CTO of the merged company which will retain the Broadcom name. In a conference call with analysts he laid out the philosophy for merging the two company's engineering teams if the deal closes as anticipated by April 2016.

"Broadcom leverages a lot of central IP development across product lines since we are so SoC focused," Samueli said. "We will be able to incorporate some of that in the Avago model because there are some SoC products there [but] their non-SoC businesses operate very independently," he said.

Samueli

"After the deal closes we will see where we can leverage the centralised method and where we can't—it's still premature, but I think it will be a blended approach," he added.

Even less clear is what opportunities the two companies may find across their diverse product lines. Executives repeatedly noted Avago and Broadcom have parts that ride side-by-side in everything from Apple iPhones to Ethernet switches and set-top boxes. However, it's clear they have yet to explore the matrix of possibilities that presents.

"It's too early to predict how we will manage this," said Hock Tan, chief executive of Avago who will become CEO of the new Broadcom. "Our key focus is sustainable growth, [predicting] five per cent [revenue growth] is conservative, but something we think is very achievable given we are in multiple sustainable franchises," he said.

Tan also promised a move to sustainable gross margins above 60 per cent. The bigger spending clout of the combined companies will help fuel that drive, he said.

"With the industry growing just 5-7 per cent a year, this is a way to bolster sales," said Brian Matas, vice president of market research at IC Insights. "Since the industry isn't growing as fast as it used to, companies have to grow by consolidating," he said, noting the latest deals to combine NXP and Freescale as well as Cypress and Spansion and a number of second-tier players.

"This is not the end, but it will be one of the bigger deals," Matas said. "In the next five years, there might be another 10 of the top suppliers no longer on our top 50 list due to M&A," he said.


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