Broadcom: The $600 Billion AI Chip Giant

Broadcom, now the second largest AI chip company globally, has experienced remarkable growth, evolving from a $4 billion enterprise in 2009 to a $600 billion juggernaut. Originating from Hewlett-Packard's semiconductor division, Broadcom expanded through strategic acquisitions, including LSI Logic and Broadcom itself, under CEO Hock Tan's leadership. Tan's focus on strengthening core franchises and cutting non-essential projects has been pivotal. Recently, Broadcom has capitalized on the AI boom, particularly through its partnership with Google on TPU chips, positioning itself as a key player in the AI chip market alongside Nvidia.

• Broadcom is the second largest AI chip company globally, valued over $600 billion, surpassing companies like Visa and closely trailing TSMC.
• The company experienced exponential growth, increasing its value 150 times from $4 billion in 2009.
• The narrative explores Broadcom's transformation from a small chip division to a major AI industry leader.

"Broadcom is the second largest AI chip company in the world. Thanks to that, the company is the 11th largest company in the world."

• Broadcom's significant position in the AI chip market underscores its influence and scale in the global tech industry.

• Broadcom originated from a series of corporate spin-offs, beginning with Hewlett-Packard's decision to create Agilent Technologies in 1999.
• Agilent Technologies encompassed HP’s non-core businesses, including semiconductors, and initially accounted for $8 billion of HP's $47 billion revenue.
• Despite a strong market debut, Agilent struggled post-Dotcom bubble, leading to revenue declines and layoffs.

"The company now known as Broadcom started as a spinoff of a spinoff. In March 1999, the iconic California-based computer-maker Hewlett-Packard decided to split into two."

• The strategic split aimed to streamline HP's core operations, setting the stage for Broadcom's eventual emergence.

• In 2005, Agilent's Semiconductor Products Group was sold to KKR and Silver Lake Partners for $2.65 billion, with Singapore's government co-investing.
• This period marked a peak in private equity activity, with major deals occurring globally.
• The semiconductor division had a legacy dating back to 1961, producing components like FBAR RF filters and optical transceivers.

"In June 2005, they put up their chip division - called the Semiconductor Products Group - up for sale."

• The sale represented a pivotal moment, transitioning the semiconductor division from a corporate subsidiary to an independent entity.

• Avago Technologies was formed in December 2005 as the largest privately-held fabless semiconductor company.
• The company aimed to leverage its independence to optimize operations and focus on core competencies.

"Thus in December 2005, Avago Technologies emerged into the world. It was the largest privately-held fabless semiconductor company in the world."

• Avago's creation marked a new chapter, emphasizing strategic autonomy and market-driven growth.

• Hock Tan, with a diverse background in finance and technology, became Avago's CEO shortly after its founding.
• Tan's career included roles at Pepsi, General Motors, and Commodore International, providing him with a robust foundation for leading Avago.

"Hock Tan is of Chinese descent, born in Malaysia. At the age of 18, he won a scholarship to MIT, where he received a bachelor's degree."

• Tan's leadership and vision were instrumental in steering Avago towards success, leveraging his extensive experience and strategic insight.

• ICS, founded in the late 1970s, was a design house specializing in semiconductor products, notably silicon timing devices.
• The company's innovation replaced traditional crystal timing elements with silicon solutions, marking a significant technological advancement.

"In the late 1980s, they developed a hit new product - a silicon timing device or frequency timing generator."

• ICS's innovation in timing devices played a crucial role in its success, highlighting the importance of technological advancement in the semiconductor industry.

• Hock Tan joined ICS in 1994, becoming CFO in 1995 and COO in 1996. He led a leveraged buyout in 1999 and became CEO.
• ICS merged with Integrated Device Technology in 2005, with Tan as chairman, before he was recruited by Silver Lake to be Avago's CEO.

"He starts with a point of view that the semiconductor industry has matured ... The businesses must be run differently than when they were growing up."

• This quote highlights Tan's strategic approach to managing mature businesses differently than during their growth phase.

• Tan emphasizes focusing on a company's core "franchises," likening ICS to a franchise for timing solutions.
• A franchise in this context refers to being the go-to choice in a specific market niche, akin to a localized monopoly.

"We have essentially in our business almost a franchise ... in the sense that anybody who wants timing solutions ... would immediately think not just of crystals but of silicon, and not just silicon but of Integrated Circuit Systems."

• Tan describes ICS's dominance in the PC space as a franchise, highlighting its strong market position and preferred status.

"It's about putting together a very good portfolio of product franchises to create a lot of value ... There’s no long-term vision or ambition other than that ... Frankly, we overinvest to ensure we are way ahead of No. 2 or No. 3."

• Tan focuses on building a strong portfolio of product franchises to maintain a competitive edge, emphasizing a lack of long-term vision beyond this strategy.

• Tan's strategy involves focusing on cutting-edge products within the franchise and expanding into new verticals.
• He advocates for cutting speculative projects that don't support the core franchise, despite criticism of reduced R&D and sales of non-leading divisions.

"We’ll stick to our knitting, essentially, which is silicon timing solutions. Our strategy is to expand applications, and increase market share in digital consumer and communications."

• Tan outlines a focused growth strategy centered on silicon timing solutions, aiming to expand application areas and market share.

• Avago underwent significant restructuring to focus on analog, mixed signal, and optoelectronics franchises, selling off non-core businesses.
• The sales helped pay down debt and reduce headcount, setting the stage for a successful IPO in 2008.

"By 2008, though Avago's revenue and earnings had not changed all that much since the acquisition, the company had paid off a billion dollars of net debt."

• This indicates the financial restructuring success, leading to a significant reduction in debt despite stable revenue and earnings.

• Avago's IPO coincided with the smartphone boom, leveraging their work in FBAR RF filters to capitalize on the demand surge.
• RF filters are crucial for separating data signals from noise in mobile phones, enhancing power efficiency and user experience.

"RF filters are critical but unheralded parts of the mobile phone. They help the modem separate the data signal from noise - saving on power and improving the user experience."

• This quote underscores the importance of RF filters in mobile technology, highlighting their role in improving device performance.

• HP developed FBAR filters in the 1990s, releasing the first commercial filter in 1999 and a GSM band filter in 2001.
• Avago acquired Infineon's BAW RF acoustic filter business in 2008, expanding into SMR filters.
• The mobile revolution, driven by 4G-LTE, increased RF filter complexity and market value, benefiting Avago financially.
• Smartphones' demand for efficiency led to the integration of RF front-end components, excluding transceivers and modems.
• By 2013, mobile constituted 50% of Avago's revenue, prompting diversification efforts.

"In 2010, Avago was first to market with an RF filter for the 4G-LTE bands. LTE sparked a mobile data revolution across the world, forcing RF filters to have to accommodate increasingly more bands plus Wi-Fi and Bluetooth."

• Avago's innovation in RF filters catered to the growing demand for multi-band support due to the LTE revolution.

"The RF filter industry grew from about $100 million in 2004 to over a billion in total revenues a decade later. Avago earned a good chunk of that money."

• The RF filter industry experienced significant growth, with Avago capturing a substantial market share.

• Avago acquired LSI Logic in December 2013 for $6.6 billion to diversify its revenue streams.
• LSI, founded by Wilf Corrigan, initially thrived with a "master slice" system for custom chips but faced challenges post-Dotcom bubble.
• Transitioning to a fabless model, LSI focused on custom silicon for data centers, enhancing its enterprise storage systems.
• LSI's acquisition of Agere Systems in 2007 strengthened its position in wired and wireless communications networks.
• Avago's acquisition of LSI was heavily financed, involving significant borrowing and strategic asset sales to pay down debt.

"In December 2013, Avago announced that it would acquire LSI Logic for $6.6 billion."

• Avago's acquisition of LSI marked a strategic move to expand into the data center market.

"In May 2014, they sold LSI's flash memory solutions...to Seagate for $450 million. Then in November 2014, they sold LSI's network chip unit, called Axxia, to Intel for $650 million."

• Avago strategically sold LSI's non-core assets to manage debt and focus on core competencies.

• Avago acquired Broadcom in 2016 for $37 billion, marking the largest technology deal at the time.
• Broadcom, established in 1991, was renowned for analog system-on-chips and grew with cable and broadband markets.
• The acquisition included a name change to Broadcom and the addition of co-founder Henry Samueli to the board.
• Following Broadcom, Avago acquired Brocade for $6 billion, continuing its cycle of cost-cutting and debt repayment.

"The $37 billion acquisition was the biggest technology deal up until then. Avago paid a nice 28% premium on Broadcom's share price."

• Avago's acquisition of Broadcom was a strategic expansion, despite the significant financial premium.

"Little over a year later, Broadcom acquired another storage networking company Brocade for about $6 billion."

• Broadcom's acquisition of Brocade exemplifies its strategy of expanding into storage networking while managing financial obligations.

• Avago/Broadcom's strategy involved acquiring assets, optimizing them, and aggressively paying down debt.
• This approach is likened to real estate investment, where properties are improved and leveraged for financial gain.

"It is a big company version of buying properties on mortgage, fixing them up, renting them out, and then paying down the debt aggressively."

• Avago/Broadcom's acquisition strategy mirrors real estate investment practices, focusing on value enhancement and debt management.

• Broadcom aimed to acquire Qualcomm, offering $103 billion, which was rejected by Qualcomm's board.
• Qualcomm filed a notice with CFIUS to block the acquisition due to national security concerns.
• CFIUS was concerned about Broadcom's reputation for cutting R&D, potentially affecting Qualcomm's competition in 5G technology.
• Broadcom attempted to re-domicile to the U.S. to bypass CFIUS, but the Trump Administration blocked the deal with an executive order.
• Qualcomm's market cap has since risen, but the stock price remains stagnant due to various challenges.
• The decision to block the acquisition preserved Qualcomm's ability to compete in wireless markets like 5G.

"Broadcom offered $103 billion - an offer immediately rejected by the Qualcomm board as too low."

• Broadcom's initial offer was deemed insufficient by Qualcomm, leading to further negotiation attempts.

"CFIUS highlighted concerns about Broadcom's reputation of cutting R&D, feeling that it would extinguish Qualcomm's chances of competing in 5G technologies."

• CFIUS's concerns centered around Broadcom's potential impact on Qualcomm's R&D and competitiveness in 5G.

"The Trump Administration ended the whole kerfuffle when it issued an executive order blocking the deal."

• The deal was ultimately blocked by an executive order, emphasizing national security considerations.

• Following the blocked acquisition, Broadcom shifted focus to acquiring software companies like CA Technologies, Symantec, and VMWare.
• Broadcom's acquisition of LSI Logic in 2013 included a custom silicon design division, which later became crucial for AI chip development.
• Google's collaboration with Broadcom for TPU design highlighted the cost-effectiveness of outsourcing custom silicon design.
• The AI boom, spurred by ChatGPT's success, increased demand for TPUs, benefiting Broadcom significantly.
• Broadcom's TPU revenues grew from $50 million in 2016 to an estimated $750 million by 2020.
• Google's increased TPU purchases projected to reach $8.5 billion in 2024, positioning Broadcom as a key player in AI chip production.

"When Avago/Broadcom acquired LSI Logic in 2013, they also acquired a small custom silicon design division that helped external customers produce their own chips for the data center."

• Broadcom's acquisition of LSI Logic provided a foundation for its involvement in AI chip design and production.

"When ChatGPT blew up in November 2022, it started the current AI boom, with everyone from startups to tech giants getting into generative AI."

• The rise of ChatGPT marked a significant turning point, driving widespread interest and investment in AI technologies.

"SemiAnalysis projects that Google will pay Broadcom far more in 2024 for TPUs - something like $8.5 billion."

• Broadcom's partnership with Google is expected to yield substantial financial gains, underscoring its strategic importance in the AI sector.

• Broadcom operates like a publicly traded private equity fund, acquiring and optimizing technology franchises.
• The company's strategy involves streamlining acquired businesses and leveraging them for further acquisitions.
• Broadcom's involvement in the AI boom positions it to invest heavily in maintaining its competitive edge.
• The company's history of adapting to industry shifts suggests a strong commitment to sustaining growth through strategic investments.

"Broadcom is a publicly traded private equity fund masquerading as a semiconductor company."

• Broadcom's business model emphasizes acquisition and optimization, akin to a private equity approach.

"They grow whenever they buy something new. This time, one of their franchises has stumbled into the heart of the AI boom."

• Broadcom's growth strategy relies on acquiring and leveraging new technology franchises, with AI being a current focus.