Evaluating the profitability of Broadcom/Avago (I’m using this name to remind myself that Avago renamed itself after the company it bought) and Qualcomm is important for those deciding whether the acquisition of the latter by the former goes ahead in the next few days/weeks.
My Figure shows the annual profitability (which I calculated by revenues by net profit) of most of the players, including those major companies acquire by each. Although Avago has changed it’s name, I’ve labelled each company by it’s original title.
It looks as if Avago/Broadcom is doing a better job than Qualcomm on managing its profitability; however it’s almost impossible to tell for a number of reasons:
- All of these companies have been using their cash to acquire others – in other words they generate far more cash than they report as profit.
- Making semiconductors – even for fabless suppliers – is a long term business requiring huge investments that only pay back in the long term.
- Qualcomm paid the US government $5.3 billion in December in order to repatriate as much as $34 billion in profit funds in December under the Tax Cuts and Jobs Act and so reported losses of almost $6 billion;
- Broadcom/Avago has made no announcement on its repatriation payment, so its Q4 profits can only be guessed at (I’ve assumed a $2 billion payment in the Figure, but it may be far more).
The consolidation among semiconductor companies has reached its zenith, but there is no simple argument about profitability that can sway the decision. Personally I hope it doesn’t go ahead because it would create a number of virtual monopolies which will reduce choice, lock customers into single vendor solutions and ultimately put up prices. This will make Broadcom/Avago even more dominant in a vital market.
If this is an interesting topic for you why not look at my early paper on the acquisition of European NXP by Qualcomm? The costliest acquisition in the IT industry may be about to be surpassed!