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Chipmakers Avago, Broadcom join forces in $37B merger

The combination continues the consolidation in the chips business, as firms bulk up to better supply components to more connected gadgets.

Broadcom should soon find a new home with Avago Technologies. Broadcom

It's getting harder and harder to go it alone in the chips world.

A new example of that fact came Thursday, with Avago Technologies agreeing to buy fellow chipmaker Broadcom for $37 billion.

The tie-up of the two midsize chipmakers will create a bigger player supplying components for smartphones and other gadgets, though even the combined companies won't come close to the revenue of the three dominant players in chips: Intel, Samsung and Qualcomm.

Still, the new deal points to a big trend in chips, in which companies need to find new partners or acquisition targets to stay alive in their rapidly changing and capital-intensive market. Another major impetus for these deals is the so-called Internet of Things, a concept of bringing online billions of new objects -- from lampposts to clothing -- which chipmakers see as the next big market for their processors and radio chips. For now, no one company has a broad enough portfolio to serve the young Internet of Things space, so these firms are all trying to partner or acquire their way there.

For consumers, all this consolidation may result in just a handful of companies taking control of bigger chunks of the chips market, potentially resulting in fewer options and higher prices. As a potential benefit, the combinations could help make the Internet of Things a reality more quickly.

The Avago deal comes after NXP in March agreed to buy fellow chipmaker Freescale for $11.8 billion and Qualcomm inked a deal for Bluetooth-focused CSR for $2.5 billion last year. Also, Intel was rumored to be pursuing Altera, but that deal never materialized.

Avago will acquire Broadcom for $37 billion, including $17 billion in cash and $20 billion in Avago stock, the two companies announced Thursday. The new firm will adopt Broadcom's name and will be led by Hock Tan, Avago's president and CEO. The deal is slated to close in the first quarter of next year.

Combined, Broadcom and Avago brought in $12.7 billion in revenue last year, compared with Intel, the world's largest chipmaker, generating $55.9 billion in revenue.

For most consumers, the tie-up between Avago and Broadcom is a behind-the-scenes shift. Avago makes semiconductors for a wide range of products, including cars, printers, exercise equipment, and digital cameras. It's also a major player in the business and government sector, where its products help to power data centers.

Broadcom, meanwhile, is perhaps best known for its Bluetooth and Wi-Fi chips running in a range of smartphones and tablets from Apple, Samsung and others. Broadcom chips are also available in set-top boxes and vehicles.

For Avago, the former chips arm of Hewlett-Packard, the deal could mean more bargaining power with device makers to bundle its chips into their products. The company has been on an acquisition spree lately, buying data-center chipmaker LSI Corp. for $6.6 billion and smaller firms Emulex and PLX Technology, all within the past year.

Broadcom shares with down 2.9 percent in early trading, following a huge lift midday Wednesday after the Wall Street Journal reported the companies were in advanced talks. Avago shares were down 2 percent.