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How Will the Broadcom Merger Change Avago’s Business Composition?

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Revised business structure after the Broadcom merger

Avago Technologies (AVGO) has been an outlier in the semiconductor industry. In February 2016, the company completed the biggest merger in the semiconductor industry. In March 2016, it reported growth in revenue and profit margins at a time when the semiconductor industry has been grappling with declining earnings. The merger had no effect on Avago Technologies’ fiscal 1Q16 earnings, but let’s look how the merger will change the company’s structure.

Avago Technologies completed its merger with Broadcom on February 1, 2016, after its fiscal 1Q16 came to an end on January 31. The impact of the merger will be reflected in fiscal 2Q16 earnings. The combined company is named Broadcom Limited and bears the ticker AVGO.

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Product portfolio of the combined company

The combination of the two companies will create a comprehensive portfolio of communications semiconductors. Avago Technologies is well known for its RF (radio frequency) content used in smartphones and electronic, fiber-optic, optoelectronic, server storage, PCIe (peripheral component interconnect express), and ASIC (application-specific integrated circuits) components. Broadcom will add an array of wireless and wired communication solutions to the combined company and change the composition of the business segments, as seen in the above graph.

Tackling the slowing growth in smartphone sales

Both Avago Technologies and Broadcom served the smartphone market, with Apple (AAPL) and Samsung Electronics (SSNLF) accounting for a larger chunk of their revenues. The merger will reduce Broadcom Limited’s exposure to the wireless segment while enabling it to take advantage of the increased RF content in the flagship products of Samsung and Apple.

Moreover, Broadcom Limited will face tough competition from Qualcomm (QCOM) in the mobile SoC (system-on-chip) space.

The share of revenue coming from the slow-growth wireless communications and industrial segments will fall, but that of the fast-growth wired infrastructure segment will increase.

Reduced costs

The combined company will eliminate “non-core businesses,” which are largely from former Broadcom, and categorize them as discontinued operations. This will reduce operating expenses by $80 million. On top of this, the merger is expected to generate $750 million in cost synergies over the next six quarters. However, less than one-third of these synergies are likely to be realized immediately in fiscal 2Q16.

The iShares Russell 1000 Value ETF (IWD) has a broad portfolio of large-cap stocks spread across various industries. It has 0.17% of its holdings in AVGO and 0.71% of its holdings in QCOM.

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