The combination is the most dramatic evidence yet of the pressures building in the tech sector as once high-growth companies have been forced to face the realities of a maturing industry.
The rise of groups such as Apple and Samsung has also squeezed many parts of the tech supply chain, forcing component makers to race for greater scale to survive.
Avago has already emerged as one of the sector’s most acquisitive companies, striking three deals in the past year alone.It said it would pay $17bn in cash and about $20bn in stock to acquire California-based Broadcom, which makes communication chips used in data centres and mobile devices made by companies including Apple and Samsung.
“Growth is not what it was. It’s just an overcapitalised industry,” said Ambrish Srivastava, an analyst at BMO Capital Markets.
Like other analysts in the sector, he predicted the deal would lead to an intensifying of the merger and acquisition pressure in the chip world.
In the tech sector, the deal is topped only by the $38bn all-share purchase of optical networking components supplier SDS by JDS Uniphase at the peak of the stock market bubble in 2000.
US-listed Avago has benefited from the low tax rate afforded by its Singapore domicile as it has set out to become one of the industry’s prime consolidators.
But while its effective tax rate last year was only 9.6 per cent, below the headline rate of 35 per cent faced by US corporations, that was higher than the 4.1 per cent reported by Broadcom, which benefited from international tax planning and past tax losses.
The spate of mergers in the sector is being driven partly by technological progress which has made it possible to squeeze more computing and communication functions on to a single “system on a chip”, said Patrick Moorhead, an independent chip analyst.
“The game becomes to integrate or get integrated,” he added.
Broadcom has seen its growth shrivel in recent years as customers in both the wireless and datacentre worlds have forced prices down and bought more components from fewer, bigger suppliers. Avago predicted it could squeeze $750m of annual cost savings out of the acquisition.
As a big supplier of mobile communications chips to Apple and Samsung, Broadcom would strengthen Avago’s presence in a sector that already accounts for about 40 per cent of its business.
Avago’s stock has jumped fourfold over the past two years, thanks to its strong position in some of the silicon components required in 4G smartphones.