TXN Texas Instruments Incorporated

Leading chipmaker Broadcom Corporation (BRCM) completed the acquisition of security software developer SC Square Ltd. for $41.9 million.

The company paid the consideration in cash, with a certain sum placed into escrow. Consequently, Broadcom acquired outstanding shares of capital stock and other equity rights of SC Square.

Based in Israel, SC Square is a provider of Security Chip and Communication solutions, including e-Health, e-ID, e-Passport, Citizen cards, Signature cards, e-Employee cards and e-Banking solutions.

Broadcom stated that SC Square’s expert team of engineers’ focus on security is a vital element for Broadcom platforms. Furthermore, the team of engineers of SC Square supports Broadcom’s strategy to acquire innovative technologies and high quality teams. However, management expects that the transaction will slash earnings per share by 1 cent for the remainder of fiscal 2011.

The company follows a strategy of deploying its strong cash flow generated from businesses in acquisitions (Dune, Teknovus, and Innovision), which power its product portfolio. Moreover, the company expects strong demand for its new Ethernet Passive Optical Network chipsets and high-end switch fabric products from the integrated acquisitions of Teknovus and Dune.

Based in Irvine, California, Broadcom is a fabless company engaged in designing and marketing semiconductor components of network voice, video, and data traffic for various applications.

We are positive on Broadcom’s product leadership, solid financial performance and strong cash flow generation ability. However, we remain apprehensive about the pressure on margins due to the accelerated new product ramps and acquisition costs.

The company also faces stiff competition from QUALCOMM Incorporated (QCOM) and Texas Instruments Inc. (TXN).

We prefer to wait for improvement in margins, which drives our Neutral recommendation on Broadcom with Zacks #3 Rank translating into a short-term rating of Hold.

 
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