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3 New Potential Buyout Targets for Broadcom

Leo Sun, The Motley Fool

President Trump recently blocked Broadcom's (NASDAQ: AVGO) hostile bid for Qualcomm (NASDAQ: QCOM) on national security concerns, abruptly ending the biggest planned tech takeover in history. However, Broadcom is widely expected to buy other companies instead, since inorganic growth is one of its core strategies.

Today's Broadcom was known as Avago Technologies until 2016, when Avago acquired Broadcom for $37 billion and assumed its brand. Prior to the merger, Avago acquired interconnect solutions provider Emulex and LSI, a top supplier in the wired infrastructure, wireless, and industrial markets. After merging with Broadcom, it bought network gear maker Brocade for $5.5 billion.

Two puzzle pieces symbolizing a merger.

Image source: Getty Images.

If Broadcom had successfully acquired Qualcomm, it would have closed in on Intel (NASDAQ: INTC) and Samsung (NASDAQOTH: SSNLF) as one of the largest chipmakers in the world. But with the Qualcomm deal dead, let's examine three other likely buyout targets for Broadcom.

MediaTek

Qualcomm's biggest rival in the smartphone SoC market (besides first-party chipmakers like Apple (NASDAQ: AAPL) and Samsung) is Taiwanese chipmaker MediaTek (NASDAQOTH: MDTKF). Qualcomm controlled 42% of that market during the third quarter of 2017, according to Counterpoint, while MediaTek controlled 14%.

MediaTek's Helio P60 SoC.

Image source: MediaTek.

MediaTek's stock has dropped nearly 40% since its multi-year peak in July 2014, due to slowing smartphone sales and tough competition from Qualcomm. However, MediaTek's SoCs are still widely used in low-end and mid-range phones from companies like Samsung, Xiaomi, Sony, and Lenovo.

Intel, which lost the mobile market to Qualcomm, is often cited as a potential suitor for MediaTek. However, MediaTek would also be a great fit for Broadcom, since Broadcom already supplies plenty of other components -- like power amplifiers and touch screen controllers -- for smartphones. Bundling those components with MediaTek's SoCs could generate big content share gains among lower-end devices.

Apple also reportedly plans to replace Qualcomm's modems with Intel and MediaTek's modems in future iPhones and iPads. Broadcom is already a major Apple supplier, so the addition of MediaTek's modems would boost its content share in new iDevices.

MediaTek only has a market cap of about $17 billion -- a much lower sum than the $117 billion it was ready to pay for Qualcomm.

Cirrus Logic

Cirrus Logic produces a variety of analog and mixed-signal ICs which are split into two categories -- chips for portable audio products, which generate the lion's share of its revenue, and chips for non-portable audio devices and other products. Cirrus' top customer is Apple, which accounted for 86% of its sales last quarter. Its audio chips are used in iPhones, iPads, Macs, and other devices.

Apple's iPhone X.

Image source: Apple.

Cirrus' dependence on Apple is often cited as its biggest weakness. But if Broadcom buys Cirrus and bundles its audio chips with its other components for Apple, it would gain content share while ensuring that it remains a top Apple supplier for the foreseeable future.

Cirrus' shares have fallen 20% over the past 12 months due to softer smartphone sales. Analysts expect its revenue to rise just 1% this year as its earnings drop 3%.

Those numbers sound anemic, but Broadcom could cut Cirrus' costs and boost its margins by integrating it into its own operations. Cirrus has an enterprise value of just $2.6 billion and trades at 11 times forward earnings -- so it could be bargain.

Xilinx

Back in 2015, Broadcom, then known as Avago, was reportedly interested in buying FPGA (field-programmable gate array) maker Xilinx. FPGAs, which can be reprogrammed for a wide variety of applications across multiple industries, could complement Broadcom's sprawling portfolio of chips for the wired infrastructure, wireless communications, enterprise storage, and industrial markets.

Xilinx's only meaningful rival in this market is Altera, which was acquired by Intel in late 2015. Xilinx is still the market leader in FPGAs, but the bears often cite competition from Intel as its strongest headwind. If Broadcom buys Xilinx, it would gain a lot more traction against Intel -- which relies on Altera (now known as its Programmable Solutions Group) as a core growth driver.

Analysts expect Xilinx's revenue to rise 7% this year, but for its earnings -- weighed down by a tax impact and higher operating expenses -- to drop 15%. The company has an enterprise value of about $18 billion, but it isn't that cheap at 26 times forward earnings.

Therefore, Broadcom might be waiting for a pullback before it considers buying this chipmaker -- which already rallied nearly 30% over the past 12 months.

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Leo Sun has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Apple. The Motley Fool owns shares of Qualcomm and has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool recommends Broadcom Ltd and Intel. The Motley Fool has a disclosure policy.