Avago Technologies is set to buy chip maker Broadcom in a $37 billion deal to create the world’s No. 3 chipmaker by revenue.

The combined company will have annual revenue of $15 billion, behind Intel and Qualcomm, and ahead of Texas Instruments.
Avago, based in both Singapore and San Jose, California, will save $750 million in costs on an annual run rate basis 18 months after the deal closes.

Avago posted $4.27 billion revenue in its latest fiscal year ended in November. Broadcom clocked $8.43 billion revenue in 2014 – growing at 1.5 percent.

Avago CEO Hock Tan will be CEO of the merged company. “Our key focus on the business model long term is very sustainable growth, in very strong niche markets that we like,” said Avago CEO Hock Tan.

Chipmakers in deal market

Chipmakers are looking at acquisitions to gain scale and improve efficiencies, while tapping new growth areas such as the Internet of Things (IoT) and connected cars. Significant drop in PC market has also prompted them to look for acquisition.

NXP Semiconductors agreed to Freescale Semiconductor in March for $11.8 billion.

Avago agreed in February to buy networking company Emulex for $606 million. This apart, Avago decided to buy chipmaker LSI for $6.6 billion.

According to market reports, Intel has also been in talks to buy chipmaker Altera in a deal that could top $10 billion.

Will Qualcomm respond?

The year 2014 saw merger and acquisition (M&A) activity among the major semiconductor vendors. Avago Technologies’ acquisition of LSI, propelled the company into the top 25 semiconductor vendors for the first time. MStar Semiconductor was merged with MediaTek. ON Semiconductor acquired Aptina Imaging.

The telecom industry is now watching for the action from Qualcomm. Reuters reported that Avago Technologies’ $37 billion deal to buy Broadcom creates challenges for Qualcomm and may force the world’s largest mobile chip maker to radically rethink its own strategy. Qualcomm dominates the market for connectivity chips on smartphones.

Irvine, California-based Broadcom makes chips for set-top boxes, smartphones and networking gear. Broadcom recently decided to shut down its baseband unit and eliminated about 2,500 jobs, saying it wanted to focus on the broadband, connectivity and infrastructure markets.

Semiconductor market

Semiconductor revenue is expected to grow 4 percent to $354 billion in 2015, according to Gartner – driven by smartphones, solid-state drives (SSDs) and ultra-mobiles. The traditional PC segment will experience the greatest decline.

Intel is the Semiconductor market leader with 15.4 percent share, while Samsung has 10.2 percent and Qualcomm has 5.7 percent share. Broadcom is in the eighth position with 2.5 percent market share, according to Gartner.

Baburajan K
[email protected]