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Why Are Broadcom Corporation and Avago Technologies Ltd Soaring Today?

By Anders Bylund - May 27, 2015 at 3:18PM

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Buyout rumors always swirl around Avago, and for good reason. However, Broadcom might prove to be a tough bite to swallow.

Image source: Broadcom.

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of semiconductor designer Broadcom (NASDAQ: BRCM) soared as much as 23% higher Wednesday, following a Wall Street Journal story [subscription required] claiming that industry rival Avago Technologies (AVGO -1.79%) might acquire the company. Avago shares rose as much as 10% on the news.

So What: The Journal says that the two companies are in "advanced talks" regarding a merger, but couldn't clarify what the buyout terms might be. You almost have to assume that any merger agreement between these near-equals would rest more on stock-swapping than on cash payments: Each company is worth roughly $30 billion today, but their cash reserves are far thinner.

Now What: I wouldn't rule out Avago looking for another round of growth by acquisition, but Broadcom would be a surprising choice.

Avago has a proven thirst for large acquisitions, including the recently closed $609 million Emulex buyout and the $6.6 billion LSI Technologies pickup. The stock also jumped 4% two weeks ago, when Reuters spread the word that Avago was looking for another buyout. The proposed merger targets that time came with market caps as large as $12 billion. Even so, Broadcom would be a very ambitious partner. The two companies also serve very similar markets, raising the specter of regulatory hurdles.

Anders Bylund has no position in any stocks mentioned. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Apple Inc. Stock Quote
Apple Inc.
AAPL
$171.52 (-1.51%) $-2.63
Broadcom Limited Stock Quote
Broadcom Limited
AVGO
$548.43 (-1.79%) $-10.02

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