Cramer: A Broadcom-Xilinx Tie Up Just Makes Sense

 | Aug 30, 2016 | 12:59 PM EDT
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Stock quotes in this article:

avgo

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xlnx

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armh

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adi

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lltc

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lrcx

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klac

When I read the bold initiation from Citigroup analysts on Broadcom (AVGO) , my jaw dropped. Not only is Citi saying that Broadcom, which is the amalgam of Avago and Broadcom, has $15.50 in peak earnings power -- not bad for a $177 stock -- but right out in the open, the analyst predicted that Xilinx  (XLNX) could be the next acquisition for this incredibly acquisitive company. And that it would be 10% accretive, giving Broadcom a chance of making $11.78 in 2017.

Broadcom is one of my favorite stocks. It has great communications technology. It has the Internet of Things and cellphone businesses.

That's not remarkable.

What was remarkable, quite simply, was that the analyst, Christopher Danely, just put the Xilinx merger out there, as if it were a product announcement or a change in management. And Danely is a very thorough chronicler of the tech group. It was as if he said,"Oh yeah, and Broadcom will probably buy Xilinx."

This would be no small deal: Xilinx is a $13 billion company. The company that makes key communications and defense chips is at its 52-week high. This would not be a cheap acquisition -- or at least not as cheap as it would have been not long ago.

But what it says is that there is so much consolidation in the air -- it has become so accepted after deals like Softbank buying Arm Holdings (ARMH) or Analog Devices (ADI) purchasing Linear Tech (LLTC)  -- that it is just too logical for Broadcom not to do so.

What's driving this? There are so many different semiconductor companies out there that consolidation is key. The semiconductor companies need heft to battle customers. Just like the semiconductor equipment companies -- think Lam Research (LRCX) to buy KLA Tencor (KLAC) -- need to merge to get more scale.

Do I think that Broadcom will buy Xilinx? Here's my take: We know from the stock price now that Avago was right to pick up Broadcom, even given that it was pretty expensive when the acquisition occurred.

I have to think the same thing could happen here. Or put it this way: How else right now could Broadcom boost its earnings 10%? From new products? From layoffs? From new customers? How about with cheap money from buying Xilinx. It's the fastest and cheapest way to grow earnings.

Therefore, I expect it to happen -- because it just makes too much sense not to happen. As do all of the other merger stories I see on the horizon.

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