In May, Avago announced the bold $37 billion acquisition of Broadcom. Now that the euphoria is fading, we can look at the probable realities on Broadcom’s side, thanks to some insight from Bob Wheeler, analyst at the Linley Group.
When any company is acquired, changes are expected, if not inevitable. Broadcom won’t be an exception, as Wheeler is quick to point out. Avago has a history of implementing long-term financial models, and for Broadcom, that means cuts are likely coming.
“I think in the short term, [the acquisition] will be largely beneficial to everybody other than Broadcom employees who are getting pink slips,” Wheeler says. “In the longer term, I do think that there will be new opportunities for competitors. We think of consolidation as reducing competition, but here I think it could enable it.”
That’s particularly true in Ethernet switch chips, where Avago might assume there isn’t much need to invest, especially when Broadcom already boasts 90 percent market share, Wheeler says.
“That’s dangerous because it leaves an opening for competitors. Broadcom has had little competition in the past because of ineptitude, but new people are moving to the market.”
One of the possible rivals? Cavium.
Wheeler says Cavium is in a unique position to disrupt the chip market with the new Xpliant chip family, but its reach remains unproven. He thinks it will take time and a few iterations of Xpliant before Cavium “gets it right,” and says in two years, the company could have a meaningful impact on the market. If that does end up happening, competition stands to grow as customers look to new players and opt for less vendor concentration.
Wheeler says there is no doubt Avago will continue to invest in Broadcom, but it will become a question of pace and how aggressively it will push the roadmap for certain Broadcom products.
Wheeler says Broadcom’s R&D spending totaled 23 percent of revenue, up from Avago’s current 15 percent and future expectation of 16 percent. Add to the equation that the two companies don’t have overlapping products, and that means that some of Broadcom’s lines could be put on the back burner or fall off the roadmap completely.
In the infrastructure and networking group, one product possibly on the chopping block is Vulcan, an ARM-base processor, Wheeler says. Because it’s still under development, he believes Broadcom will continue to push for its creation, but Avago could likely nip it.
On the connectivity side of things, Avago might have interest in selling off Broadcom’s WiFi combo chips, but since baseband providers and smart phone processors already have this technology, there’s a short list of buyers. Wheeler says that the biggest deal, if Avago chooses to take that path, would be completely divesting Broadcom’s broadband business. “The most likely buyer would be Qualcomm, because that’s a piece they don’t really have.”
Wheeler also notes that the two companies stand to butt heads over what he calls a cultural clash. Avago runs a tight and lean ship, with cuts across the board. Broadcom, on the other hand, has historically been a company that has looked to build and enhance growth.
Wheeler’s advice to Broadcom: Stay the course.
“I think Broadcom needs to do what they’ve been doing. Investing ahead in market requirements. They have always had a very forward-looking approach, and they need to continue looking aggressively toward the next technology transition. They should be in a good position to defend their market share if they do that.”