Broadcom’s acquisition strategy
Broadcom (AVGO) has grown significantly over the last few years under the leadership of CEO Hock Tan, both organically and through acquisitions. Broadcom’s fiscal 2018 earnings again showed how synergies have boosted Broadcom, which acquired Brocade Communications in November 2017.
Since 2015, Tan has been looking for acquisition targets that could improve Broadcom’s profit and cash flow and broaden its communications semiconductor portfolio. He targets companies that are market leaders, have high cash flow, and are not at the peak of their business.
Impact of acquisitions on Broadcom’s earnings
As shown in the above graph, Broadcom’s annual revenue has been increasing at a double-digit percentage rate. In 2016, when Avago Technologies acquired Broadcom, it included its earnings of that fiscal year. Broadcom’s revenue rose 18% YoY (year-over-year) in fiscal 2018, as it included Brocade Communications’ earnings of that fiscal year. Broadcom expects its fiscal 2019 revenue to rise 17% YoY to $24.5 billion, as it estimates that its CA Technologies acquisition will add $5 billion in annual revenue.
Broadcom has also increased its profit and cash flow through aggressive cost-cutting and acquisition synergies. Between fiscal 2017 and fiscal 2018, the company’s operating margin expanded from 45% to 50% and its free cash flow rose from 31% to 39%.
Broadcom’s mergers to date have been linked to its core businesses, connectivity solutions and enterprise storage solutions. In fiscal 2019, the company is set to integrate the earnings of CA Technologies, which it acquired after its acquisition of Qualcomm (QCOM) was blocked by Donald Trump.
CA Technologies is set to add a new revenue stream (Infrastructure Software) to Broadcom’s earnings. From the first quarter of fiscal 2019, Broadcom plans to divide its revenue into two segments, Semiconductor Solutions and Infrastructure Software, instead of into Wireless Communications, Wired Infrastructure, Enterprise Storage, and Industrial & Other. In this series, we’ll see how acquisitions affect Broadcom’s earnings.
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