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What Is the Strategy behind Cypress-Broadcom’s All-Cash Deal?

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Cypress acquires Broadcom’s Internet of Things business

In the previous part of this series, we discussed how Cypress Semiconductor (CY) is acquiring Broadcom’s (AVGO) wireless IoT (Internet of Things) business for a cash consideration of $550 million. The deal is expected to close in fiscal 3Q16. Why is Broadcom selling its IoT business to Cypress, while companies such as Qualcomm (QCOM) and Texas Instruments (TXN) are eyeing the IoT?

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Why did Broadcom sell its IoT business?

During Cypress’s fiscal 1Q16 earnings call, CEO Thurman John Rodgers explained that Broadcom offloaded the wireless IoT segment for two reasons. First, Broadcom needed the cash to repay a portion of the huge debt it raised for the Avago Technologies-Broadcom merger. Second, the IoT business is not in line with its business model. Broadcom focuses on a few very large customers, whereas the IoT is fragmented with a very large customer base.

Financial aspects of the acquisition 

An all-cash deal signals Cypress’s confidence in the acquisition. Broadcom’s wireless IoT business had annual revenue of $189 million in fiscal 2015 and the $550 million price tag means Cypress is paying 2.9x the former’s trailing sales.

Cypress chief financial officer Thad Trent stated that the IoT business is growing at an annual rate of 17%. At this rate, it is expected to break even in fiscal 2H16 and start generating positive earnings in fiscal 2017. On the profitability front, Cypress data communications division executive vice president Badrinarayanan Kothandaraman stated that the IoT business has a gross margin of around 50%.

Products gained through the acquisition

The acquisition will bring Broadcom’s Wi-Fi, Bluetooth, BLE (Bluetooth low energy), and ZigBee products to Cypress’s portfolio. This could strengthen its position in the automotive, industrial, and consumer space.

Cypress would also get access to Broadcom’s WICED (wireless Internet connectivity for embedded devices) IoT brand. WICED is an SDK (software development kit) that allows engineers to design sophisticated connections using Broadcom’s software. Cypress stated that WICED is a high-margin business and its results could contribute to its fiscal 2017 earnings.

While the acquisition could bring several benefits for Cypress, its integration with the current IoT business is equally important. Next, we’ll look at Cypress’s plan to integrate the IoT business into its business model.

The iShares Russell 1000 ETF (IWB) has holdings in large-cap US equities across various sectors including technology. It has a 0.40% exposure to QCOM, a 0.29% exposure to AVGO, and a 0.02% exposure to CY.

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