December 12 - Is Broadcom Corporation Really In Talks to Buy InvenSense?
By Ashraf Eassa - December 12, 2014
According to RANsquawk (via Seeking Alpha), Broadcom is allegedly "in talks to acquire InvenSense." The source of the rumor claims that it is unconfirmed. While I personally wouldn't bet big bucks on any unconfirmed buyout rumor from a random website, I do think that this is an interesting potential acquisition to try to analyze.
Does Broadcom buying InvenSense actually make sense? Let's dive in.
Trying to understand the buyout rumor
In order to determine whether a company may be interested in buying another company, I like to ask myself two "big picture" questions:
- Can the potential acquirer even afford to buy the potential buyout target?
- Does such an acquisition make sense given what we know about the businesses?
There are, of course, many other questions that one could ask, but I think that exploring these will give us a pretty good sense of whether this rumor is bogus or not.
Can Broadcom afford to buy InvenSense?
Broadcom has about $3.32 billion in cash and $1.59 billion in debt, according to Yahoo! Finance. If it were to acquire InvenSense for, say, a 50% premium to the most recent close, this would run Broadcom about $2 billion. Given that Broadcom has signaled that it intends to be more aggressive in returning its on-shore cash to shareholders via dividend and buyback, it seems a stretch that Broadcom would be willing to pay for InvenSense totally in cash.
Now, Broadcom could certainly do a deal that involves a mix of stock and cash, particularly as Broadcom shares have run up quite nicely over the last year. However, we'll see in the next section why Broadcom may not be willing to do that.
Does InvenSense fit in strategically with what Broadcom is doing?
Broadcom recently held its analyst day, and I find the following slide particularly helpful in trying to understand what the company's longer-term financial and strategic goals are:
Source: Broadcom.
Note the key points here: Broadcom is emphasizing profitable growth, and it wants to focus its product mix toward higher gross margin percentage products. Most importantly, though, Broadcom will now assess the success/failure of a given acquisition by determining which company's shares were the better buy in terms of adding to the bottom line: Broadcom's or the company in question's?
From a strategic perspective, InvenSense would add about $361 million in revenue to Broadcom's top line (per current analyst consensus) at non-GAAP gross margins in the high 40% range depending on the quarter. This would be pretty significantly below Broadcom's recently revised target model of gross margins in the range of 54-57% (up from 50-52%).
Additionally, Broadcom is targeting operating margins including share-based compensation of between 19% and 24%, and operating margins of 23-28% excluding share based compensation expenses. How does InvenSense stack up?
Well if we look at the company's fiscal year 2012 and 2013, we see it was able to register 33% and 32% operating margin, but in fiscal year 2014, the company saw a drop to 24%. Year-to-date InvenSense is at 10% but this includes the one-time inventory writedown, so it's not likely representative of a long-term trend.
At any rate, if Broadcom sees InvenSense as a company able to consistently deliver the operating margin levels that Broadcom is targeting for itself, then the acquisition may "fit in" financially. Keep in mind, though, that even this would be a necessary but insufficient condition for Broadcom to pull the trigger on this relatively large acquisition.
Yay or nay on this rumor?
By picking up InvenSense, Broadcom would grab more chip content inside of the tier-1 smartphone vendors, and it would a fairly high-growth revenue stream. However, given Broadcom's focus on improving both its gross and operating margin percentages, InvenSense may not fit into Broadcom's new business model.
While only Broadcom and InvenSense management know whether talks for an acquisition of the latter by the former are taking place, I'm not convinced that it's true or that such a deal would even make sense.
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