Avago Earnings Highlights Need for Broadcom Merger

Avago Technologies Ltd. (NASDAQ: AVGO) reported its fiscal second-quarter financial results Thursday after the markets closed. The company had $2.13 in earnings per share (EPS) on $1.61 billion in revenue, versus Wall Street consensus estimates of $2.00 in EPS on $1.63 in revenue. The same quarter from the previous year had $0.85 in EPS on $701 million in revenue.

In terms of guidance for the third fiscal quarter, the company expects about $1.74 billion in revenue and for gross margin to be 60% to 61%. There are consensus estimates of $2.05 in EPS on $1.69 billion in revenue for the second quarter.

Hock Tan, president and CEO of Avago, commented on earnings:

We delivered solid second quarter revenue while significantly exceeding gross margin and EPS expectations for the quarter. We expect to resume revenue growth in the third quarter driven by strength in our wireless and enterprise storage segments.

At the end of this company’s second quarter, it had $2.51 billion in cash and cash equivalents, compared to $1.6 billion.

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Avago is in the process of acquiring Broadcom Corp. (NASDAQ: BRCM) for the sum of $37 billion. Some are calling this the largest tech acquisition of all time. What is certain is that this acquisition will have sweeping ramifications across the sector.

Suddenly, it is easier to see the driver here. Here is what a combined deal might generate as well, without considering the overlap of orders that might be a wash: Avago’s market cap is $35 billion, versus $28 billion for Broadcom (pre-news). Broadcom is expected to have about $8.6 billion in 2015 sales and almost $9 billion in 2016, while Avago is expected to have sales of $6.8 billion in 2015 and $7.4 billion in 2016. Without considering mergers, operating income in 2014 was $438 million for Avago and $694 million for Broadcom.

It is worth mentioning that Broadcom has been the subject of rumor in the past. The difference here from the past is that Broadcom typically has been considered the acquirer in most rumors of years past. As with all mergers, the buyer and the seller have to consider that they are in a more scrutinizing regulatory environment now. This might not be enough of a dominating force that regulators would block a deal, but one never knows for sure.

Shares of Avago closed Thursday up 0.6% at $142.38. Shares were up 0.8% at $143.50. The stock has a consensus analyst price target of $147.19 and a 52-week trading range of $68.71 to $145.47.

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