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Broadcom leads way as chipmakers turn to software deals

Broadcom’s [NASDAQ:AVGO] USD 61bn cash offer for VMware [NYSE:VMW] shows just how important software is becoming for semiconductor companies.

The transaction continues Broadcom’s revenue diversification away from its silicon roots. The server virtualization software company adds to Broadcom’s other software plays in recent years – most notably its USD 18.9bn deal for CA in 2018 and its USD 10.7bn purchase of Symantec’s enterprise security business in 2019.

North American semiconductor companies are buying a smaller number of their peers and increasingly turning to software companies instead. Deals for chipmakers have declined from a high of 69 in 2009 to a low of 21 in 2021. Meanwhile, deals for software companies have crept up, reaching 17 last year. 

In 2022, for the first time ever, the numbers have inverted: in the year to date, North American chipmakers have acquired eight software companies versus only four of their direct rivals. By value, software dealmaking by chipmakers has totaled USD 74.2bn in YTD 2022 – thanks mostly to VMware – compared with USD 9.8bn-worth of semiconductor acquisitions.

In search of growth

Software firms are being targeted for two main reasons. First, Moore’s law – the observation that the number of transistors on an integrated circuit roughly doubles every two years – is reaching its physical limits and with it the pace of innovation. That results in flattening growth for makers of central processing units (CPUs) and graphic processing units (GPUs). Buying software companies can really help with revenue diversification, especially for big players like Broadcom, Intel [NASDAQ:INTC] and Nvidia [NASDAQ:NVDA],  says one industry executive.

Another reason behind the greater desire for software, especially for CPU and GPU makers, is that writing the code that runs the silicon chips they design ensures optimal performance. The shift is akin to the evolution from flip phone to smartphone, which resulted in device makers owning more of the software, says a second executive. “Everything’s becoming more software defined.”

Exceptions

Not all chipmakers are created equal, however. Those that design artificial intelligence (AI) chips or processors that crunch data on devices at the edge of the network, as opposed to inside data centers, operate in a fast-growing niche already. For them, finding growth elsewhere is unnecessary, argues the first executive.

Analog semiconductor companies are another exception to the clammer for software, adds a third executive. Their hardware – examples include the silicon inside power cords or the high-speed cables in data centers– does not need software to run.

Indeed, one of the top five semiconductor acquirors of all time is Analog Devices [NASDAQ:ADI], buoyed by its USD 28.7bn deal for Maxim in 2020. Only one of its 42 deals was in software, the rest involved semiconductor companies.