Saturday, December 21, 2019

Broadcom's future and its impact to Inari

A few friends and I were discussing about this and the news came as a surprise as we thought that the RF division of Broadcom or rather then Avago is the cashcow for Broadcom. It is the business unit that enables Avago and its CEO to where it is today. Ask any veteran in the business, when HP split into 3 companies, it was the wireless division which was the one harder to bring up. Of course things changed when Apple introduced Iphone 3 and Avago's filters were monopolizing the industry which later on includes selling the chips to Androids phones.

Anyway, could the news be true as Broadcom has not made any statement. Today's Broadcom is much much more than the old Avago which was barely a $5 billion company. It has so many cashcows and who would want to bet against one of the best fund manager who is also the CEO of Broadcom aka Hock Tan. Broadcom today is building solutions for the cloud which includes semiconductors for servers and it is expanding into software, hence the acquisition of CA and Symantec's enterprise division, a security company. These happened after its much talked about failure to acquire Qualcomm. If that would have happened, the industry would be amazed. I would have been proud of a Malaysian who probably would have been one of the best manager in the recent semiconductor industry.

We also talked about the today's Broadcom or Avago. We hear and know that it is not a visionary company. It is a company that has proven to be able to pick up technologies which has great potentials for the next medium term and make them even more profitable. Those traits has been proven in its deals with LSI Logic, Brocade and ultimately Broadcom itself - through a takeover by Avago. In short, Hock Tan and his team are great deal-makers, executioners, managers and negotiators. On the bad side, they do not really take any deal with a passion. Cutting costs is part of the game - and that involves cutting people. The plan to sell the RF division is one of such, it was its saviour. Now it is not needed anymore. Why? The acquisitions of CA and Symantec have increased Broadcom's debt to exceed $30 billion against its cash of $5 billion.

While Broadcom has great cashflows, it however will want to do something before it can do another deal. Hence, it needs to sell before it can buy big again. Hence, the plan to sell the RF division. Anyway, for the next generation 5G technology, Broadcom's RF may not be at a huge advantage anymore. Several new companies are moving big into it, and it is ripe time to sell. Remember, Broadcom is not that much of a technology visionary but a company which manages its technology dominance very well.

What then will happen to Inari? For those who may not know, the RF business is huge for Inari as compared to its other businesses. It is also probably more profitable. Will Inari continue to still obtain jobs from its new acquirer assuming the business is sold. I would not want to make a guess. However, one thing I can be quite certain is that the relationship would not be the same. One must remember, it was Broadcom which gave opportunities to Inari back in 2006 (around) when Avago then wanted to focus on being a factory-less company. It was looking for companies or entrepreneurs to take over the manufacturing (packaging) business. In fact, at one point of time, Avago was a shareholder of Inari prior to its listings.

The industry knows the relationship between Broadcom and Inari. Will Broadcom give Inari business from its other product line? That is up to Inari to prove itself. One thing as well is that the age of important decision makers from Broadcom which provides the opportunities for Inari is not so bright for Inari's future as they have reached (or almost) retirement age.

The way I look at it, with the share price of Inari trading at 30x PE (after the recent drop) and given that the future is uncertain - it does not look too good. Even if the division is not sold, this news bring reminders to us. A 30x PER which equates to 30 year to get back your money does not provide a good comfort, given the pace of the industry move. Inari will definitely be there but it has to look for other deals which may not be as lucrative but to grow.

My worry is that the cradling stage for the largest Malaysian semiconductor company - by market cap - may be over soon and it has to look after itself and it may not have the strength to do so - if you know what I mean.


Anonymous said...

dear poster,

can you explain why there was virtually no dividend payout before the RM1 billion private placement @ RM1.80 ....

and after the private placement, The dividends Totalled RM1.80 (including the special dividends from selling assets) . Is this a coincident or what?

They are not the owners, this company is public listed, they are the majority shareholders, while they cashed out, all the liabilities are on the listed entity, not them.

felicity said...

You are referring to Airasia? The injection was a period before and the dividend was much later i.e. more than 2 years later.



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