The Real Reason Behind the Rash of Semiconductor Consolidation

In two separate record deals recently, Intel (NASDAQ: INTC) agreed to purchase Altera Corp. (NASDAQ: ALTR) for $17 billion in cash, and Avago Technologies (NASDAQ: AVGO) agreed to buy Broadcom Corp. (NASDAQ: BRCM) for $37 billion in cash and stock.semiconductor-consolidation
Once these deals close – both expected sometime next year – the semiconductor industry will be forever changed.
The surface reasons behind both of these deals are straightforward enough. Intel is already partnered with Altera at the foundry level, and Avago and Broadcom have complementary products in the wireless and Ethernet space.
But this semiconductor consolidation represents more than just a few dollars of cost synergies. It marks a significant change for the hardware industry as a whole.
The market demand for hardware is not what it was 10 or even just five years ago. Faster computers and processing speeds have been the innovative driver for semiconductor companies for more than half a century. But speeds in just processing and computation aren’t the primary driver anymore. Hardware manufacturers are struggling to keep up with the demands from the end-users and product developers.
It’s no secret that the traditional PC market is weak, and will remain weak for the foreseeable future. The introduction of tablets, smartphones, smartwatches, smart appliances and smart accessories has presented a whole new challenge to the chip designers of old.
Intel has certainly felt that pressure, probably more than any other hardware company. It still controls roughly 80% of the PC microprocessor market. But with that segment shrinking compared to these other end-products, that’s been more of a negative than a positive.
On the other side of this story, Avago and Broadcom are dealing with changes in the communications industries. They each make products that are essential for both wireless communications and wired infrastructure. But with more and more demand for all products to be connected to each other – think of those commercials featuring refrigerators with Twitter (NYSE: TWTR) updates – these two companies are struggling to keep up.
That’s not to say that their investors have been struggling. Since Avago’s initial public offering during the Great Recession, its stock is up more than 750%.
So there are both problems and great opportunities these chip makers face. That’s what these deals are all about. There’s no industry that changes as fast as the tech industry, so deals need to be struck.
And these two deals aren’t the only ones. In March, NXP Semiconductors (NASDAQ: NXPI) announced it was buying Freescale Semiconductor Ltd. (NYSE: FSL) for $12 billion. And the speculation around deals for both Qualcomm (NASDAQ: QCOM) and NVIDIA Corp. (NASDAQ:NVDA) are everywhere you look.
Where the semiconductor industry goes from here is impossible to say. The only certainty will be the continuation of this consolidation within the industry.
Intel now has a great starting point. The Altera deal rapidly grows its potential customer list. In five years’ time, it won’t be known as the PC chip maker of old. It will be in on the ground floor of customizable chips for a great number of high-end products. Two areas highlighted in the conference call announcing this deal were facial recognition hardware and automotive assisted-driving chips.
The Avago deal represents more of a down market, or cheaper product, attraction. The new $77 billion combined company, going by the Broadcom name, will focus its efforts on communication between devices we’ll find in our homes and offices over the next several years.
But as with all industry-wide consolidations like this one, there will be winners and losers.
The short-term winners will be Broadcom and Altera – companies with products already on the market that need a real powerhouse foundry or platform to expand. After all, both transactions were at high premiums over their current market value. Shares of both Broadcom and Altera jumped more than 15% when the deals were announced.
However, the long-term winner will be the company with the most resources and need for cutting-edge products and chip designs. In the marathon of how all this consolidation plays out, Intel is the clear winner of these two deals.
But a smart investor would keep an eye out for what Qualcomm does from here. With more than $15 billion in the bank and practically no debt, you can bet on a deal at some point.
Both Intel and Qualcomm are down so far this year. And with this massive industry-wide semiconductor consolidation, now’s the time for long-term investors to get in on these chip-making giants.

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