Broadcom’s potential acquisition targets
Now that the Qualcomm’s (QCOM) takeover story has come to an end, Broadcom (AVGO) is set to domicile in the US and look for smaller acquisitions. Looking at Broadcom’s past acquisitions, we can say that it looks for companies that are leaders in their segment.
For instance, Broadcom was a leader in the Ethernet switch market, Brocade Communications Systems was a leader in the FC SAN (storage area network) switch market, and Qualcomm is a leader in the smartphone chip market.
By acquiring market leaders, Broadcom looks to gain pricing power in that market. Other criteria include stable revenues, high gross margins, similar end markets, and complementary products. Broadcom’s CEO, Hock Tan, looks for opportunities to cut costs and enjoy economies of scale.
Many analysts listed several potential acquisition targets for Broadcom, but Micron (MU) and Xilinx (XLNX) were the common companies in most of these lists. Both FPGA and memory products would complement its data storage business and are essential components in 5G deployment.
According to Barron’s, RBC Capital Markets analyst Amit Daryanani prepared a list of potential acquisition targets for Broadcom based on four parameters. These parameters are a $10.0 billion–$120.0 billion market capitalization, a gross margin over 50.0%, operating expenses over 25.0%, and a PE (price-to-earnings) ratio of less than 30.0x.
Micron (MU) has a market capitalization of ~$60.5 billion and a PE ratio of ~6.2x. It operates in a highly consolidated memory chip market and has a comprehensive portfolio of DRAM (dynamic random access memory), NAND (negative AND), and 3D XPoint.
Over the last three quarters, Micron has improved its gross margin over 50.0% and its operating margin over 40.0%. Its operating expenses stood at 9.0% of revenues in the quarter ended March 1, 2018. According to StreetInsider, KeyBanc analyst John Vinh believes that Broadcom could consider acquiring Micron, considering that Broadcom bid on Toshiba’s (TOSBF) memory business.
Xilinx (XLNX) has a market capitalization of $18.4 billion and a PE ratio of 28.4x. It is a leader in the FPGA (field programmable gate array) market. It has a gross margin of 71.0% and an operating margin of 30.0%.
However, its operating expenses comprise 41.0% of its revenues. Apart from its operating expenses, Xilinx meets all other criteria for Broadcom as a potential acquisition target.
Whether Broadcom undergoes another acquisition or not, its fundamentals are strong. Now that it has been relieved from the pressure of accumulating funding for a $117.0 billion acquisition of Qualcomm, its financial flexibility has improved.