Broadcom Reaches Out Again in Growth Race
As part of its bid to become the region’s preeminent high-tech company, Broadcom Corp. added to its record growth Wednesday with the planned purchase of its eighth company in a little more than a year.
Using its skyrocketing shares as currency, the Irvine chip developer, already the fastest growing chip maker ever, said Wednesday that it planned to buy Stellar Semiconductor Inc. in San Jose for an estimated $180 million in stock.
In pursuing a strategy of growth through acquisitions, Broadcom is following a well-worn path blazed by such high-tech giants as Cisco Systems Inc., the world’s second-most valuable company after Microsoft Corp.
Though Broadcom’s sales are far smaller than those of Cisco and chip rival Intel Corp., the Orange County company dominates a hot high-speed communications market driven by consumers’ ravenous appetites for new products.
The ultimate goal of these companies is to meld cable television systems and other computer networks to offer interactive services such as Internet access and telephone connections.
Earlier this week, Broadcom bought an Atlanta software company, Digital Furnace Corp., for about $136 million in stock, bringing the tally of its shopping spree to more than $1.2 billion.
“You can either develop your technology in-house or buy it from someone else,” said Mike Paxton, an analyst with the research firm Cahners In-Stat Inc.
“Right now, everything is about getting your product out on the market and being the first one there. Acquisition, even with some of the problems that go along with it, is a faster way to go. And for Broadcom, it’s a smart strategy.”
Details of the acquisition were released well after the stock market closed. Even so, Broadcom gained $8.63 a share Wednesday to close at $206. The company is one of Southern California’s highest valued technology firms, with a market capitalization of $42.9 billion.
Stellar creates technology that makes interactive television and Internet content more attractive. It reduces the amount of information needed to create digital images and graphics over the Net, yet keeps the quality of these images high.
Stellar’s technology, which is already being incorporated into Broadcom’s products, is designed to boost the quality of services such as on-demand movies, Web browsing and online computer games.
The technology would be added to the Irvine company’s chips for interactive set-top boxes, high-definition television sets and, eventually, for hand-held Internet devices, officials said.
The proposed deal is expected to close by the end of the month. By then, Stellar will be rolled into Broadcom’s existing digital video research group in San Jose. Gupta will continue to oversee his team of 30 employees, most of whom are engineers.
Such mergers--whether small like Stellar or enormous like the America Online and Time-Warner deal--reflect the high-tech world’s hunger for new development and the constant pressure to remain on the cutting edge.
Cisco, long considered Silicon Valley’s king of mergers, gobbled up 21 companies in the last year and expects to swallow as many as 25 more this year.
But its aggressiveness in making acquisitions is matched by its skill at making them pan out, analysts said.
The company picks the right targets, often buying stakes in start-ups to get an early peek at promising technologies, then pounces when the ideas come closer to fruition. Cisco also has become expert at making newcomers feel welcome, making management and administrative changes as wrinkle-free as possible.
“Cisco and Broadcom have very similar acquisition strategies,” said Greg Sheppard, a vice president at research firm Dataquest who tracks the semiconductor market. “Like Cisco, Broadcom tends to buy smaller companies with staffs of 100 people or fewer. It’s easier with these smaller companies to move fast, bring them in and do more to keep them happy.”
All of the businesses that Broadcom has bought, regardless of what they make, share similar traits. All have staffs that are dominated by engineers, not sales or marketing people.
Each has a product that is about to be released or will be launched within six to nine months.
And more important, analysts say, all are flourishing outside the radar of Broadcom’s larger rivals.
“They’re making the right choices,” said Mike Wolf, senior analyst for Cahners. “Somehow, Broadcom spots them before they go public and before anyone else [notices them].”
Moving fast is imperative, say analysts, as the race to control the key elements of this computer-networked future is just beginning.
So far, Broadcom is in the lead and topped $500 million in annual sales in only its second year as a public company, a first among chip companies.
But competition is growing--both for market share and for finding companies to buy.
Intel, with annual sales that are more than 50 times larger than Broadcom’s, spent more than $6 billion in the last 12 months to buy 14 companies in the networking and communications space.
As a result, Intel has become a formidable rival, analysts say.
So has Conexant Systems Inc., the Newport Beach chip maker that was spun off by Rockwell International Corp. in 1998. Conexant bought two companies in December but describes its growth strategy as less reliant on acquisitions and more focused on internal innovation.
Conexant paid almost $1 billion for its most significant purchase, Maker Communications Inc., a Massachusetts networking technology firm. But unlike some of Broadcom’s targets, Maker already had products out on the market, said Conexant spokesman Tom Stites.
“It’s better [for us] to go for someone who’s there than someone who’s almost there,” he said.
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Southland Tech Giants
Irvine-based Broadcom is the third-largest publicly held technology company based in Southern California, as measured by stock market capitalization (stock price times number of shares outstanding). The top 10 tech firms in the region, based on Wednesday’s market caps, shown with sales in the last four reported quarters:
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Market 12-month capitalization sales Company Ticker (in billions) (in billions) 1. Qualcomm QCOM $98.4 $4.1 2. Amgen AMGN 66.4 3.3 3. Broadcom BRCM 42.9 0.5 4. Gateway GTW 22.1 8.6 5. QLogic QLGC 21.8 0.2 6. Conexant CNXT 18.1 1.7 7. Applied Micro AMCC 14.3 0.1 8. Hughes Electronics* GMH 13.4* 6.9 9. Computer Sciences CSC 12.5 8.9 10. Peregrine PRGN 7.3 0.2
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* Market cap is approximate for Hughes Electronics because it is a division of General Motors that trades independently as GM’s Class H tracking stock.
Sources: Market Guide, Bloomberg News
