“Despite Avago’s earlier statement to grow by acquisition, this acquisition of another company also of US$2.5 billion annual revenue is a bold move. It moves the company further from the cluster of smaller (US$1 billion revenue or below) communication semiconductor vendors such as Applied Micro, PMC-Sierra, Cavium and into a cluster with Broadcom (US$8 billion annual revenue) and Freescale (US$4 billion).
In Ovum’s view, the market is changing quickly under the onslaught of cloud model. Both companies have distinguished old family trees, but have significantly and continuously re-invented themselves since 2005. We believe the scale coupled with willingness to evolve rapidly should serve the combined entity well in a market where vendors are trying to grab strategic position at the same time as keep with aggressive product roadmaps.
Although management cites datacenter, comms infrastructure and enterprise networking as target markets, the real bull’s eye for both companies’ strategies is the part of those markets exposed to cloud. In a recent earnings call, Avago’s CEO called out hyperscale customers as the growth engine while traditional enterprise was flat. Avago’s strength in industry-leading embedded 28G and 30G SERDES were likely key to the 65 percent win rate it claims on datacenter ASICS in the past two years. Its fiber optics business differs from many of its nominal competitors in having a heavy custom and embedded slant. Potentially both the Avago SERDES and optical interconnect could be applied to LSI’s custom or standard networking silicon. Conversely, LSI has system and software expertise that enables the vendor to engage with customers at an architectural level that opens up new possibilities for differentiated product.
