What’s Behind These Acquisitions?
Karen is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Acquisitions aren’t made for the sheer joy of a company spending its money. Sometimes the reason behind the acquisition is obvious and other times it takes a little bit of detective work to find out the reason why.
Whatever Intel (NASDAQ: INTC) wants, Intel gets. The semiconductor giant has been on an acquisition spree this year as the company moves further into high performance computing (HPC). Once the domain of scientific research, HPC is fast becoming a business staple due to the speed at which vast amounts of information are processed. Intel bought Cray to obtain their interconnect technology, QLogic’s InfiniBand for high-speed fabric networking and Whamcloud for its advanced file system software for supercomputers. Intel also announced the company had entered into HPC R&D contracts with the U.S. Department of Energy. Through strategic acquisitions, Intel continues to widen the gap between their competitors as they look to retain their lead as the number one computer chip maker in the world.
The long-standing rivalry between Broadcom (NASDAQ: BRCM) and the United Kingdom’s CSR ended with Samsung’s purchase of CSR. For the $319 million purchase price, Samsung received CSR’s Bluetooth, Wi-Fi and GPS chips along with 21 patents to use in future patent wars with Apple. Through this acquisition, Broadcom has moved from being one of Samsung’s vendors to becoming their newest rival. Samsung can now manufacture their own chips in-house at potentially lower costs and can also develop chips specifically designed for new generations of smartphones and tablets.
This acquisition certainly isn’t good news for Broadcom. The company saw their 1st quarter 2012 earnings fall by 61%. Samsung and Apple were two of Broadcom’s major chip buying clients, and with Samsung’s departure, the company must now look elsewhere to make up for the shortfall. Broadcom’s 2Q earnings fell 8.6% due to a 12% increase in their operating costs. The company posted profit of only $160 million, down from the $175 million reported a year earlier.
Lloyd Blankenfein, CEO of Goldman Sachs (NYSE: GS), is one of the smartest men on Wall Street today, so what motivated him to sell Goldman Sachs profitable Administrative Services division? As the third largest custody bank, State Street (NYSE: STT) oversees almost $900 billion in alternative assets. State Street purchased the Administrative Services division for $550 million to cement its position as the biggest servicer of hedge funds. The transaction is scheduled to close sometime in 4Q this year, and will add another $200 billion in assets under State Street’s management along with about 150 clients. State Street 2Q earnings dropped 3% to $2.4 billion from the same time last year and the company is focusing on the hedge funds to take advantage of that market’s 12% annual growth rate.
So why did Lloyd sell? One reason is that the Administrative Services division functioned as a back-end unit and never really fit with Goldman Sachs prime brokerage business. But the Fed is increasing their pressure on investment banks with a new onslaught of regulations, and combined with the lack of synergy between the two departments, was enough to warrant the sale.
Looking past the headlines at the underlying reasons for an acquisition can help an investor decide if the time is right to open, add to or close out a position. The announcement of future acquisitions may serve as a signal to investigate the possible hidden reasons for the transaction.
kprogers has no positions in the stocks mentioned above. The Motley Fool owns shares of Intel. Motley Fool newsletter services recommend Goldman Sachs Group and Intel. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.