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Biggest Semiconductor Merger in History

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The share price of Avago Technologies Limited (NASDAQ:AVGO) has had its ups and downs on heavy trading today following its announcement that it had entered into an agreement to acquire semiconductor sector rival Broadcom Corp (NASDAQ:BRCM) for a sum of $37 billion in cash and stock. According to Forbes, this will be the biggest semiconductor merger in history.

Avago will consummate the deal by securing an additional $9 million in long-term debt to supplement its $17 billion cash and $20 billion in stock. The offer represents a 28% premium on Broadcom’s market cap as of the market closing on 26 May. The merger will provide a 25 basis point virtual tax inversion benefit as a result of Avago’s incorporation in Singapore. It is projected that the merger will generate more that $750 million in cost savings in the first 18 months.

Although both companies play significant, but dissimilar roles in the semiconductor sector, they will not only benefit from the inherent synergies of their current roles, but the new company will have initial combined revenue of $15 billion, which should at least move it up in the batting order. One analyst said that, “There is actually very little strategic overlap between the two companies. What they will get out of it is size.” Regardless of what some say, size can be very important.

Some observers are speculating that this could be one of the initial phases of a spate of M&A moves in the sector. Another analyst observed that, “It makes sense for companies to be aggressive now, because there are a limited number of properties out there and I think the guys that are being more aggressive now have the best opportunities to get the best of what’s available.” That comment deserves some consideration reflecting whether survival of the biggest is necessarily the same as survival of the fittest. Companies like IBM, Xerox, and Kodak all bear witness to that subtle differentiation.

I’ve been watching AVGO and BRCM with interest most of the day just to see how things go versus earlier reports. BRCM opened down from yesterday’s close of 57.15 to start the day at 56.27. Despite a mid-morning low of 24.66, BRCM is down 1.83% at 56.11 moving into the final hour of trading. However, the volume of trading is especially notable with nearly 80 million shares trading hands. That is more than 10 times Broadcom’s average volume. I would have expected Broadcom shares to gain.

Avago shares opened at 145.28, up from yesterday’s close of 141.49. However, during the 10:00 o’clock hour it looked like Avago shares were going to tank. Then what went down came up. Avago is currently trading at 142.20, up half a percentage point. Once again, it is the volume that is the story, with nearly 23.5 million shares in trade. Again, that is 10 times greater that an average trading day for Avago.

For grins and giggles I took a gander at competitors, Intel Corporation (NASDAQ:INTC) and QUALCOMM Incorporated (NASDAQ:QCOM). The former is trading modestly up by 0.83% at 33.99. The latter is down slightly by 0.37% at 70.75. Here’s the interesting part: Intel’s volume is off by 30%; QUALCOMM’S by 50%. What does that mean? I’ll leave you to figure it out.

Image courtesy of cooldesign at FreeDigitalPhotos.net

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