Long before Snapchat or Silicon Beach were ideas, chip maker Broadcom Corp. grew from its roots in a Santa Monica condominium into a 10,000-worker powerhouse in Irvine that helped turn Orange County into a technology hub.
Co-founders Henry Samueli and Henry T. Nicholas III became billionaires in the process, and Nicholas championed Orange County as a burgeoning Southern California version of Silicon Valley.
But now, with growth in the semiconductor industry slowing and its players consolidating to better survive, Broadcom said Thursday that it, too, would merge into a rival company — removing one of the region's mainstay independent tech companies.
In a $37-billion deal, one of the largest in the tech industry, Broadcom agreed to be bought by Avago Technologies Ltd., a Singapore chip maker run out of San Jose. Avago, through spin-offs, traces its history to Hewlett-Packard Co.
It's the biggest deal for Avago, an aggressive acquirer as the industry contracts. And so important that it will change its name to Broadcom Ltd.
With the merger, the Broadcom stock held by Samueli and Nicholas would be worth nearly $1.3 billion and $1.4 billion, respectively, according to Broadcom's most recent proxy statement.
“This is a great day,” said Nicholas, who called the merger “a logical progression” for Broadcom.
“The question is not why now, but why not a couple of years ago,” he said. “Our objective has always been to be the dominant player in the marketplace. Our objective is to be No. 1. We are in striking distance of that now.”
The transaction would make the new Broadcom Ltd. the third-largest semiconductor maker.
“When Henry Nicholas and I founded Broadcom, we had a vision of creating the world leader in communications semiconductors,” said Samueli, Broadcom's chairman and chief technical officer. “Today's announcement is a continuation of that vision, and we could not think of a better partner for the future than Avago.”
The addition of Broadcom, whose chips are embedded in smartphones, cable set-top boxes, broadband systems and myriad other computing products, enables Avago to become more of a one-stop shopping site for chip customers.
Broadcom's customers include such tech giants as Amazon.com Inc., Apple Inc., DirecTV, Google Inc. and Samsung Electronics Co.
“The industry is changing,” Broadcom Chief Executive Scott McGregor told analysts Thursday. “To deliver success for both our customers and shareholders, significant size and scale are becoming increasingly important.”
Broadcom, with $8.4 billion in sales last year, began operations in 1991 and went on a buying spree that decade to bolster its growth. The company now mainly designs sophisticated chips that are manufactured by others; 75% of its employees work in research and development.
Avago, which is based in Singapore to take advantage of a lower corporate tax rate, specializes in chips for wireless communications, corporate data storage and industrial products.
Broadcom and Avago noted that their product lines have little overlap. But Avago will look to slash redundant back-office and sales operations, which is likely to mean job cuts as it streamlines Broadcom's business.
Indeed, in announcing the merger, Nicholas said in a statement that Avago has “a fast-paced, no-nonsense, process-driven business culture that we need to take our combined company to the next level.”
Avago needed consent from Nicholas, who stepped down as chief executive in 2003, and Samueli to get its merger approved because the co-founders still hold stock with 47% voting power at Broadcom.
The companies did not detail any job cuts, but they did project cost savings of $750 million in the 18 months after the deal closes, which is expected early next year.
That savings figure is expected to rise in light of Avago's track record of cutting jobs in the wake of past deals, Wedbush Securities Inc. analyst Betsy Van Hees said.
“The net losers are the Broadcom employees because of the [expected] job losses,” she said.
Nicholas was a former electrical engineering student of Samueli's at UCLA when they started Broadcom, which is now the 15th largest publicly held company in Southern California, according to FactSet Research Systems Inc.
The company prospered in good part by providing chips that enabled people to better tap into and exploit the Internet, and “their claim was quality and high speed,” said Sergis Mushell, a research director at industry research firm Gartner Inc.
Other tech firms, including computer hard-drive maker Western Digital Corp., called Orange County home when Broadcom arrived in 1995, but it was Broadcom's explosive growth that played a major role in boosting the county's tech scene, Mushell said.
“Their appearance in that area boosted up the talent,” he said. “It gave birth to a lot of new companies around it because of the talent pool.”
The company also invested in education, both at UCLA and UC Irvine, providing internships and jobs to students, said G.P. Li, a professor at UCI's Henry Samueli School of Engineering.
“Their move to Orange County made a big difference,” Li said of Broadcom, and many students ended up as full-time Broadcom employees.
“They were a big steam engine for the semiconductor industry here,” Li said. “If they never came here, I would say we would be still known as the traditional O.C. — real estate and defense.”
As employees at Broadcom's headquarters pondered the deal Thursday, Broadcom microchip engineer Rick Hsu said he was “a little surprised” at the news. “I don't think things will ever be the same again,” he said.
But he figured that the combining the companies should “boost [their] technical-engineering excellence.”
Despite Broadcom's past success, the company can't avoid a slowdown in the chip-making industry that's already spawned several other mergers, analysts said.
Sales growth in the worldwide semiconductor industry is expected to slow sharply this year, to 4% growth from 7.9% last year, Gartner estimates. Broadcom's sales last year edged up a paltry 1.5%.
Samueli and Nicholas no doubt decided “we've probably taken it as far as we can go on our own” in terms of Broadcom's expansion, said Ben Bajarin, principal analyst at the research firm Creative Strategies Inc. in San Jose.
The marriage with Avago is “an attempt to get into new categories that can spur new growth,” Bajarin said.
Including the Broadcom-Avago deal, there have been $64.8 billion worth of semiconductor mergers announced so far this year, according to Dealogic, which tracks the industry. That's five times greater than at this time last year.
This month Avago bought another Orange County tech company, networking products maker Emulex Corp. in Costa Mesa, for $606 million.
The new Broadcom Ltd. would have annual sales of $15 billion, based on last year's results. Avago Chief Executive Hock Tan will keep that post, and Samueli will join the combined company's board and remain chief technology officer.
Under the proposed Broadcom purchase, Avago will pay $17 billion in cash and the equivalent of about 140 million shares of its stock to Broadcom shareholders, who will end up with 32% of the combined company.
For each Broadcom share, Avago would pay $54.50 or nearly half an Avago common or restricted share or any combination Broadcom holders choose.
Broadcom's stock, which had soared nearly 22% on Wednesday amid reports of the pending merger, fell 90 cents Thursday to $56.25 a share. Avago's stock rose 89 cents to $142.38 a share.
Times staff writers Dean Starkman in New York and Anh Do in Orange County contributed to this report.