By Lehar Maan and Bill Rigby
(Reuters) - Avago Technologies Ltd's (O:AVGO) $37 billion (£24 billion) deal to buy chipmaker Broadcom Corp (O:BRCM) creates new competitive challenges for Qualcomm and may force the world's largest mobile chip maker to radically rethink its own strategy.
Qualcomm Inc (O:QCOM), which has dominated the market for connectivity chips on smartphones, has been looking to extend its reach into data centres and network infrastructure, but may find its way blocked by an enlarged competitor combining Avago's strength in storage and Broadcom's power in networking.
"Qualcomm has aspirations of moving into Intel's data centre processor incumbency that the Avago storage and now enterprise networking (from Broadcom) capability directly overlays," said Drexel Hamilton analyst Richard Whittington.
That could result in Qualcomm creating some sort of partnership with Intel Corp (O:INTC), he said, to combat the reach of the new company.
Wall Street analysts generally cheered the deal on Thursday, despite some fretting about price, saying Broadcom's strength in wireless networking, WiFi and Bluetooth chips is a good complement to Avago's presence in industrial and wired devices.
That presents a challenge to Qualcomm, which finds itself in a tough spot in the maturing microprocessor business, as smartphone makers such as Samsung (KS:005930), Apple Inc (O:AAPL) and Huawei (SZ:002502) put more effort into producing their own chips.
Now a Avago/Broadcom tie-up - which will take the name of Broadcom - potentially gives handset makers another viable supplier, giving them more leverage and putting even more pressure on Qualcomm, said IDC analyst Mario Morales.
"The other material impact will come from the adjacencies that Qualcomm is trying to enter now, the data centre, infrastructure and the consumer area," he added. "We see a lot of synergy in the technology they (Avago) are buying."
Qualcomm has hinted that it is looking at new areas.
"I think there's going to be a tremendous amount of growth in computing and resources dedicated to supporting the cloud," Qualcomm chief executive Steve Mollenkopf said at last year's Consumer Electronics Show. "We look at that as an opportunity for a company like ours."
The company did not immediately reply to a request for comment on its strategic plans in response to the Broadcom deal on Thursday.
Avago/Broadcom is just the latest in a wave of heavyweight mergers and acquisitions reshaping the chip industry.
NXP Semiconductors (O:NXPI) unveiled a deal in March to buy smaller peer Freescale Semiconductor Ltd (N:FSL). In the same month, Reuters reported that Intel was in talks to buy chipmaker Altera Corp (O:ALTR), which many investors expect to result in a deal soon.
That backdrop of consolidation may force Qualcomm's hand.
"Either divest themselves of the business that they are in that is in direct competition with Broadcom - and now Avago - or find a way to grow their presence," said Chris Geier, partner-in-charge of Sikich Investment Banking, assessing Qualcomm's options. "They are going to have to do one or the other. The status quo for them at this point won't work."