Broadcom’s acquisition strategy
In the previous part of the series, we saw that Broadcom’s (AVGO) leverage increased sixfold after the largest semiconductor merger. The high leverage has limited the company’s financial flexibility to fund any further long-term investments.
Acquisitions have been a core expansion strategy for Avago. At the end of 2013, it acquired LSI for $5.6 billion. Avago made its biggest acquisition of $37 billion in February 2016 to expand its communications semiconductor portfolio.
Recently, rumors about a possible acquisition of FPGA (field-programmable gate array) supplier Xilinx (XLNX) were reignited after the company announced major long-term investments at its investor day. Some analysts considered Broadcom and Qualcomm (QCOM) to be potential suitors.
In addition, Nomura analyst Romit Shah identified NXP Semiconductors (NXPI) as a lucrative acquisition target for the top semiconductor companies Qualcomm, Broadcom, and Texas Instruments (TXN).
Broadcom’s view on future acquisitions
Such acquisition rumors raised excitement among analysts about Broadcom’s future acquisition strategies. At the fiscal 2Q16 earnings call, Broadcom CEO, Hock Tan, clarified that the company’s priority is to reduce its net debt to EBITDA (earnings before interest, taxes, depreciation, and amortization) from around 4.5x to 2x.
Once Broadband achieves this target, the company may consider another acquisition or any other alternative use of capital that can generate strong returns. While another acquisition is a possibility in the distant future, the company expects its recent merger to generate synergies in fiscal 3Q16 and 2016. We’ll look at the company’s guidance in the next part of the series.
The iShares S&P 500 Value ETF (IVE) has holdings in large-cap US equities listed on the S&P 500 Index. It has 0.25% exposure in TXN, 0.90% in QCOM, and 0.05% in XLNX.