The semiconductor industry is one of opposites. On the one side, chipmakers are striving to build smaller and smaller components and on the other, chip companies, especially chip manufacturers, seem to be striving to combine their businesses. To deal with reaching for smaller chips first, this is related to power consumption and heat output. The smaller the processor, the lower the voltage that is required to drive it. The lower the voltage, the lower the power consumption but this is proportional to the square of the voltage applied. Therefore, a small change in voltage for a semiconductor, a disproportionately large impact on the power consumption of that chip (and a large change in the waste heat that the device in question must deal with).
When it comes to increasing the size of the business, here it is related to the economy of scale. The larger the company, the greater its orders both for raw materials, labor and components to device manufacturers. Larger companies can command lower prices for raw materials and are better positioned to be able to weather demands of price cuts by large original equipment manufacturers. When suppliers are negotiating with one another, it helps if they are both reasonably close in size rather than one being significantly smaller than the other, as if this happens it is typically the larger business that is able to dictate terms. And today the news is that Avago Technologies is agreeing to buy fellow chipmaker, Broadcom, for the impressive sum of $37 billion, which will be made up of $17 billion in cash and $20 billion in Avago stock. Avago and Broadcom represent mid range chipmakers and although this is a significant deal, the combined companies will not come close to the revenue created by the three dominant semiconductor manufacturers, Intel, Samsung and Qualcomm.
The statement released details how Avago and Broadcom will be able to combine their technologies to effectively compete in the new era of interconnected Internet of Things technologies, which would appear set to introduce billions of devices to the Internet. Avago manufacturer silicon chips for a number of products including cars, printers, exercise and gym equipment and digital cameras. It has significant exposure to the business and government sectors thanks to its data center technologies. Broadcom has a rich heritage in WiFi and Bluetooth radio technologies, plus considerable exposure to cars and set-top boxes, which are sure to feature in next generation IoT chipsets. However, today's news of the consolidation does have something of a warning in here too: are these two businesses huddling together to keep warm in the cold? And ultimately, will these consolidation deals result in the market being drawn up between a relatively small number of companies?