Over the years, Broadcom (AVGO) has grown through acquisitions, which has helped it increase cash flows and profits. This strategy will likely help it maintain its profits even in the semiconductor downturn. However, these acquisitions also increased its leverage. At the end of the second quarter of fiscal 2019, Broadcom had $5.3 billion in cash reserves and $37.5 billion in total debt, resulting in net debt of $32.2 billion.
During the quarter, Broadcom refinanced $18 billion worth of term debt that it used to fund its CA Technologies’ acquisition. A company refinances debt to reduce the borrowing cost or extend its maturity term. Broadcom’s average borrowing cost stood at 3.7%. It extended its average debt maturity to five years, which would leave more cash in the hands of the company to invest in the business. Broadcom doesn’t intend to repay any debt this year.
Broadcom open to new acquisitions
At Broadcom’s fiscal 2019 second-quarter earnings call, CEO Hock Tan stated that the company is open to new chip acquisitions even amid the trade war. This is a good time to make an acquisition, as chip stocks have fallen significantly amid the trade war. Moreover, the US Federal Reserve is expected to reduce interest rates, which makes loans cheaper. The only major risk is securing regulatory approval from China.
China may delay approval of M&A deals to retaliate against the United States. It did so last year with the Qualcomm-NXP Semiconductors deal. Qualcomm withdrew from that deal. Despite the risk from China, many chip companies are going ahead with acquisitions. For instance, NVIDIA is acquiring Mellanox, and Infineon is acquiring Cypress Semiconductor.
Broadcom redomiciled to the United States last year to acquire US chip companies. We believe Hock Tan might target a US chip firm.