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Avago To Acquire Rival Firm Broadcom For $37 Billion: Should Intel Worry?

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Two semiconductor manufacturers are coming together in what is known as the biggest acquisition ever made in the chip-making industry, where companies are quickly realizing that they need to team up in order to catch up to the likes of Intel, Qualcomm and Samsung.

San Jose, California-headquartered Avago, which is incorporated in Singapore where there is a much lower corporate tax, announced that it is purchasing Irvine, California-based Broadcom for $37 billion. The combined company, which will be named Broadcom Ltd., will have annual revenue of $15 billion and a market value of $77 billion. By comparison, Intel, which is the world's largest maker of chips, generated $55.9 billion in revenue last year, with a market capitalization of nearly $160 billion.

Still, the acquisition will provide the new Broadcom new means of competing with the top three chipmakers, and Avago claims Broadcom Ltd. will become the "most diverse" chipmaker once the deal is completed sometime early next year. Avago, headed by its serial acquirer, CEO Hock Tan, services a wide range of industries and has its chips running on various devices, including digital cameras, printers, exercise machines, cars and networking switches used in commercial and government data centers.

Broadcom, on the other hand, has top-tier technology players for its clients, including Apple, Samsung, Google and Amazon, which use Broadcom's Wi-Fi and and Bluetooth chips for their devices.

"The combination of Avago and Broadcom creates a global diversified leader in wired and wireless communication semiconductors," says Tan in a statement. "Avago has established a strong track record of integrating companies onto its platform. Together with Broadcom, we intend to bring the combined company to a level of profitability consistent with Avago's long-term target model."

For the past couple of years, Avago has been on a shopping spree as part of CEO Tan's strategy to divest slow-growing units while picking up smaller companies with huge potential for growth. Since 2013, the firm has spent a total of $8 billion acquiring other chipmakers, with $6.6 billion going to the purchase of rival LSI Corp.

The entire semiconductor industry, as a whole, has been seeing deals made left and right, as smaller players merge with each other to continue to remain relevant in a rapidly-changing industry. Just recently, NXP Semiconductors announced an $11.8 billion deal to buy Freescale Semiconductor, which was reported to have also been in talks with Avago before the discussions fell through. Intel itself is reported to be having acquisition discussions with Altera, which is valued at $14 billion, although a Wall Street Journal source cites the deal is not expected to materialize. 

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