Consolidation of the Tech Industry

There is a tsunami happening in the land of Mergers and Acquisitions. But instead of the tsunami carrying a massive title wave form the depths of the ocean, it is carrying a wave of capital from the depths of companies' acquisition funds. Just peaking over mountain tops.

This week:

1) Avago (AVGO) announced it would acquire Broadcom (BRCM) for $37 billion. This would be the largest tech deal in history.

2) Intel announced a $16.7 billion bid for Altera

It may be some investor's initial reaction to say that Broadcom was bought at it's tip top possible price because now is a time where M&A's are in full swing and companies are offering colossal amounts of cash for acquisitions. But the truth is that Broadcom is a gold plated asset that is willing to forsake future price appreciation to cash out.

Broadcom is the fourth largest chip vendor behind Intel, Qualcomm and Texas Instruments. Broadcom is a key player in many markets. It produces chips that power data connections in cable modems which create Wi-Fi wireless connections in your phones and tablets.

When the deal was announced, Broadcom's shares jumped 21% to $54.5 a share. So if a company this valuable is willing to sell out, it would be safe to assume that Broadcom's price is as good as it gets.

Veteran tech investor, Paul Wick who manages $5.3 billion across multiple instruments disagrees and explicitly believes that Broadcom is bullish. He said that investors should not sell their shares in Broadcom just because Broadcom is selling their company.

One reason is because Broadcom's current CEO, Scott McGregor is ready to retire and willing to sell the company and walk away with a huge pay day. Wick does not believe that the semiconductor industry has peaked, but in reality, has finally just starting to be recognized for it's true value. Avago has acquired a great asset. Broadcom has blown it's competition out of the water with ethernet switching . Broadcom holds the deal with IPhone for WI-Fi and bluetooth. And many of Broadcom's rivals like Marvell and STMicro are losing hundreds of millions of dollars a year while Broadcom is solidly profitable. As a result of all this, it is very likely that Broadcom will still appreciate and rise in value.

The Avago Broadcom acquisition is just one chapter in the rapid consolidation of the semiconductor industry. Intel will acquire semiconductor designer Altera for $16.7 billion using a combination of cash reserves and new debt. Intel believes that Altera's technology will help them comply with the "Moore's Law". The Moore's Law is the idea that the number of transistors in semiconductor circuits will double every two years leading to improved performance and efficiency. In addition, Altera's programmable chips will give Intel an advantage in the explosive "Internet of Things" market. Intel will utilize Altera's technology to establish a network of physical objects and enable them to exchange data through the internet. Examples would include smart thermostats, washer/dryers that use WI-FI for remote monitoring, heart monitoring implants, and automobiles with built in sensors. The possibilities for innovation are virtually endless.

Having said that, here goes the golden question:

How do all these recent M&S effect the rest of the market and how can investors take advantage of the tech industries' consolidation?

One strategy wold be to predict which tech company has the potential to be bought. Which in turn, would drive it's share price up.

Following recent M&A patterns, a lucrative investment would be Synaptics (SYNA). Synaptics focuses in biometrics which allows smartphones to offer a fingerprint identification feature. This market is really taking off and has minimal competition. This fact is conducive to Synaptics being a  coveted asset by bigger chip companies. Synaptics is like a 60 pound sea bass swimming around a fishing hook with an M&A attached to it. Hungry companies are looking to gain the advantage of scale.

Another tech company that is likely be bought is Marvell (MRVL). Marvell has gotten into multiple brawls with Broadcom and lost every single time. They had a terrible last quarter and will definitely do something to increase shareholder value this year. Marvell is very likely to reach for some strategic options which includes selling out and cashing in when the price is high.