How does Broadcom make money? Significant changes in business approach

Broadcom

Company Profile

No.2 listed chip company

Broadcom (ticker: AVGO) is the world’s second largest listed semiconductor company by market value, second only to Nvidia (ticker: NVDA). Broadcom is the world’s sixth-largest semiconductor company in terms of annual sales.

At present, the company has expanded into various enterprise software businesses. According to the current software M&A strategy, it is possible that software revenue will account for more than 40% of the company’s total revenue in the future.

Broadcom has 26 divisions or income statements, 17 of which are part of the semiconductor group. The semiconductor group’s revenue is approximately $30 billion. The business scale in 2019 was US$17 billion, and the business revenue in 2023 will reach US$28 billion, with an average annual compound growth rate of about 13%, much faster than the semiconductor industry.

Previousely a Singapore company

Broadcom (ticker: AVGO) is a spin-off from Hewlett-Packard (ticker: HPQ) and is headquartered in Singapore; this is because HP’s Asia-Pacific operations are headquartered in Singapore. Regarding the relationship between HP and Broadcom, I suggest you refer to my other blog article “HP is an important good company, but isn’t it a good stock?

Company History

In 1999, HP cut off its components, test and measurement, medical instruments, chemical analysis and other businesses including semiconductors, and these departments were combined to form Agilent (ticker: A). In 2001, Agilent sold its medical instrument business to Philips and the remainder to KKR Capital and Silver Lake Capital, changed its name to Avago Technologies, and moved its headquarters from Silicon Valley to Singapore. KKR Capital invited Chen Fuyang to serve as president, shut down the old Agilent business, and let him manage Avago’s listing on the Nasdaq.

Main business

Broadcom has now become an integrated holding company, but its semiconductor revenue is still over half. Its main business is:

  • The original semiconductor departments of Broadcom and Avago Technologies were two companies in the traditional chip field.
  • In the software field, Brocade, Portfolio International, Symantec, and VMWare are large-scale software companies that were acquired through mergers and acquisitions.

The company has 17 core semiconductor product lines covering wireless, networking, broadband, storage and industrial markets. It is primarily a fabless design company but also has some in-house manufacturing capabilities, such as best-in-class FBAR filters sold to Apple iPhones.

In addition, in the high-end ASIC market, Broadcom is firmly in the leading position with a market share of 35%, followed by Marvel (ticker: MRVL) with a market share of 12%.

In terms of software, the company’s main customers are large enterprises, financial institutions and government units selling virtualization, infrastructure and security software.

Failed acquisitions

Qualcomm

In 2018, Broadcom (ticker: AVGO) originally wanted to acquire Qualcomm (ticker: QCOM), but was blocked by Trump because Broadcom was not a U.S. based company. Even if it later moved its headquarters from Singapore to the U.S., it still failed. The U.S. censorship broke the game. This incident did not arouse the attention of Wall Street, and the news was only one day; but this move has a huge impact on Broadcom. After the unsuccessful acquisition of Qualcomm, Broadcom changed its course and formulated a new strategy: becoming an infrastructure software acquirer.

SAS

It’s a pity that SAS failed to succeed in the data analysis with the longest history in the US$ 20 billion M&A market in July 2021, because this company insists on having a unique corporate culture and has not been listed for decades. The income comes from government organizations and the banking industry, providing business analysis and artificial intelligence technology forecast results, which is in line with the general direction of the current software industry, and it is also a large enterprise software vendor that Broadcom wants. But this should not affect the long-term trend of Broadcom ‘s acquisition of software holding companies.

Notable mergers and acquisitions

Isahua

In 2013, Avago acquired established U.S. chip supplier Isaac Wong for $6.6 billion. Subsequently, Avago sold part of Isaac’s non-core business to Seagate and Intel, retaining the core storage business.

Imeles

In February 2015, Avago acquired data equipment supplier Imelex for US$606 million.

Broadcom

In February 2015, it quickly acquired the old Broadcom Company for US$37 billion and renamed the company Broadcom Co., Ltd., which is today’s Broadcom. The reason for the name change is that Broadcom’s industry reputation, number of patents and revenue scale are far ahead of Avago.

Avago’s acquisition of the old Broadcom became the largest merger and acquisition in the semiconductor industry at that time. After the merger, Broadcom has also become the third largest semiconductor manufacturer in the United States by revenue, second only to Intel and Qualcomm.

Brocade Communications

In 2016, Broadcom acquired network equipment manufacturer Brocade Communications for US$5.5 billion to obtain Fiber Channel switch technology and gain a larger market in the data center product market.

VMWare

In May 2022, Broadcom was rumored to be in talks to acquire VMware, a cloud computing company. VMware is a well-known platform manufacturer of cloud computing software. Dell (ticker: DELL) has spun off VMWare last year and is now completely independent of Dell. VMware’s current market cap is about $40.3 billion.

Broadcom’s software empire ambitions

Long-term ambitions on software

Acquire VMware in 2022. The most critical factor in acquiring VMware is to prepare for the future. Chen Fuyang once said, “If anyone thinks that the semiconductor industry can grow at the current rate for a long time, they must be dreaming. I am not a semiconductor person, but I know how to make money. and management”.

Who is Computer Associate?

Broadcom, which acquired Computer Associate (CA), for nearly US$ 19 billion, has now abandoned its acquisition of semiconductor companies and instead acquired mainframe and infrastructure software companies. Investors should not underestimate this step. For Broadcom, and even for the semiconductor and software industries, it can be said to have a far-reaching and important impact, because people in these two industries would never think of this. This means that Broadcom has since become a holding company, rather than a pure semiconductor company. This is the company’s most significant change after Avago successfully acquired Broadcom (ticker: BRCM) at an amazing price of 37 billion U.S. dollars in 2015.

Take CA as its software empire platform

Broadcom plans to use CA as a new platform for buying and merging other similar software companies. CA’s founder is Wang Jialian, who is of Chinese descent. At its peak, this company was the second largest software giant in the world after Microsoft. The characteristic of CA company itself is that the products have no special features, like a software hodgepodge or a hardware store. The company’s product lines are acquired through mergers and acquisitions. They have everything and sell everything, but there are few market-leading product lines. The only killer product in my impression (the price is scary, and there is no competing product with the same function in the market) is UniCenter, but now, 20 years later, this product has no advantage at all.

Symantec

In 2018, Broadcom bought all the enterprise solutions department of Symantec (ex ticker: SYMC), a well-known cybersecurity company, but Broadcom did not want Symantec’s consumer department (because the enterprise solutions is more valuable (a golden goose) than consumer solutions, please refer to my analysis on section 3-2 of my book “The Rules of Super Growth Stocks Investing”), Symantec had to change the name of the remaining part of the company to NortonLifeLock (ticker: NLOK), continue to be listed.

Broadcom acquired the enterprise security business of anti-virus software giant Symantec for US$10.7 billion, but soon sold it to Accenture (ticker: ACN).

Other software companies acquired

In 2019, Broadcom acquired Terma Analytics. This is an artificial intelligence analysis and simulation company that can assist companies in load simulation and automated processing across large mainframe and distributed system platforms. Many large retailers and banks are its customers.

Broadcom
credit: Justin Sullivan

Other important BU

IP business

Many people don’t know that Broadcom had a solid software core IP design team before it made a large-scale acquisition of a software company, and it was successfully used in the design of various chips. Broadcom turned out to be a major ASIC leader in the world, and ASIC design requires a lot of software to simulate layout wiring and IP integration. These are impossible to achieve without software. Moreover, modern chip designs are becoming more and more complex, and the trend toward AI, DL, and HPC is an obvious irreversible trend, which also leads to more and more complex chips.

ASIC Business

Broadcom’s ASIC chip design-related business starting with the famous LSI (ticker: LSI), which it previously acquired for application-specific integrated circuits (ASIC), can be said to be the basis for Broadcom’s chip design business to expand to ASIC.

Broadcom’s ASIC business’s full-year revenue in 2020 was US$750 million, up from US$50 million in 2016. In addition to chip design, Broadcom also provided key intellectual property rights to Alphabet’s Google and was responsible for manufacturing, testing and Packaging new chips and other steps to supply Google’s new data center, Broadcom is also working with other customers such as Alphabet, META, Microsoft, and AT&T to design ASIC chips.

One of its famous,important, and successful case is: Broadcom has actually customized TPUs for Google for nearly 10 years, and recently reached a cooperation with Meta to produce customized chips for it.

Charlie Kawwas, president of Broadcom Semiconductor Solutions Group, said that Broadcom won 15% of the artificial intelligence chip market in 2023 and is expected to reach 25% of the market in 2024, with total revenue exceeding US$10 billion.

Radio frequency business

Many people don’t know that Broadcom had already owned a large-scale acquisition of a software company. In short, Broadcom is a unique company in the semiconductor industry. In addition to its industry being the world’s three major radio frequency leaders, modern smartphone manufacturers cannot escape this company (please refer to my explanation on section 3-7 of the book “The Rules of Super Growth Stocks Investing” ). It is also trying to take a path that is very different from other companies.

Since its listing in 2009, the company’s share price has risen by 2,748% in 12 years, and it is a company with a high yield rate of 3.08% that is rare among technology stocks.

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