Daily Brief: When One Dealmaking Door Closes, Another One Opens For Broadcom

Daily Brief: When One Dealmaking Door Closes, Another One Opens For Broadcom

over 1 year ago3 mins

Mentioned in story

US chipmaker Broadcom is reportedly in talks to buy software company VMware, in a deal analysts reckon could be worth more than $50 billion.

What does this mean?

Broadcom’s sliding doors moment came in 2018, when its big-money bid to buy fellow chipmaker Qualcomm was thwarted by regulators’ national security concerns. The letdown motivated the company to shift its strategy, in view of transforming itself into a diversified tech company that offers everything from chips to cloud computing. It kicked things off by buying Symantec’s cybersecurity division and CA Technologies for $11 billion and $19 billion respectively, and now VMware – one of the cloud industry’s key players – seems to have caught its eye. That stands to reason: data centers and the cloud have become critical areas of growth for the company.

Large deal

Why should I care?

The bigger picture: What goes up…

It’s no surprise that Broadcom has been trying to reduce its reliance on chips over the past few years. Like other chipmakers, the company’s sales have boomed as semiconductors have become both more vital and harder to get hold of, with its chip segment growing around 20% last year alone. But the company has been vocal about the fact that the industry’s growth simply isn’t sustainable, admitting that it’s expecting to go back to its historical average of 5% a year sooner or later.

For markets: Who said dealmaking was dead?

It’s also no surprise that Broadcom thinks now’s the time to make this bid: VMware’s market value is now around half that of its peak in 2019, and Broadcom’s has more than doubled in the same period. That just goes to show that there’s still very much a market for big tech deals, as inflation and interest rate hikes bring down valuations and encourage cash-rich buyers to snag a bargain.

VMware stock
Source: Google Finance

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Xpeng Reported Worse-Than-Expected Results

Xpeng image

Chinese EV maker Xpeng reported a higher-than-expected loss on Monday.

What does this mean?

Investors aren’t an easy breed to please right now: they sent Xpeng’s share price down 5%, even as the company grew quarterly revenue by an impressive 153% and more than doubled the number of cars it delivered last quarter from the same time in 2021. That was probably because they couldn’t see beyond the higher-than-expected $260 million loss it posted, as the EV maker grappled with Chinese lockdowns and surging raw materials prices. Xpeng’s other revelations probably didn’t help settle their stomachs, either: the company acknowledged that shipments were already down 42% between March and April, leading it to issue a worse-than-expected revenue outlook for this quarter.

Xpeng loss

Why should I care?

The bigger picture: Tesla has no friends.

Xpeng isn’t the only EV producer to be hit by China’s lockdowns: Tesla’s domestic deliveries in the country fell 90% last month from the same time last year. But while Tesla is confident that the market is still ripe for the picking, plenty of its suppliers have announced plans to move at least parts of their production elsewhere. Take Primax: the camera supplier unveiled plans to significantly reduce manufacturing in China by 2024, and shift its production to Thailand and the Czech Republic instead. Analysts think this could be a sign of things to come, arguing that China’s zero-Covid policy could accelerate the trend toward more evenly distributed supply chains.

Zooming out: Someone get this country some lithium.

That’s certainly likely to be the case for EV battery material lithium, which both Europe and North America are trying to build up their own supplies of. That’s no mean feat: analysts have estimated that demand for the material will quadruple by the end of the decade, and that the sector will need $7 billion of investment every year until 2028 if it wants to meet the need.

Lithium
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