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14 July 2020

Broadcom and ARM divest assets in the fragmented IoT market

The Internet of Things is certainly evolving more slowly than some enthusiasts had hoped, especially in relation to 5G, but a significant expansion is still on the cards in the coming years. That is driving a wave of acquisitions by components companies as they seek to seize control of an important growth area. However, there are also companies which are cashing in their assets in IoT, either to make a quick cash boost, or to focus on more core activities rather than jostle for position in a crowded market.

Broadcom and ARM announced IoT-related divestments last week. The former has sold a wireless IoT unit for the second time – having offloaded a previous business in this area to Cypress Semiconductor in 2016, it is now selling its latest efforts to Synaptics.

Synaptics has been extending its IoT reach over several years, despite still being best-known for human interface technologies such as trackpads. It is now set to pay $250m I cash for Broadcom’s wireless IoT business, as the latter continues to reorganize its assets, divest non-core activities and focus more heavily on software.

Its key IoT product is the SyNAP edge system-on-chip (SoC), which integrates voice, audio, video, computer vision, machine learning and security. The company has been bundling SyNAP with wireless connectivity from third parties, but will now be able to provide a full solution. The edge SoC currently sells mainly in the consumer IoT space but has recently made some headway in industrial use cases, and the integrated connectivity should help with that move.

Under the deal, Synaptics will gain Broadcom’s WiFi, Bluetooth and GPS products for the IoT market, together with some systems still under development, which will give it a roadmap for a couple more years at least. The portfolio includes WiFi 6 and 6E, Bluetooth 5.2 and GPS L5 products, as well as underlying IP, and “access to two additional roadmap products without the additional opex spend”.

“These products can stand up against NXP, Infineon, and certainly Silicon Labs,” said CEO Mike Hurlston. “With the assets Broadcom had, they could have run the table. It just wasn’t in their strategy.”

Synaptics’ CFO Dean Butler told investors: “The addition of wireless IoT connectivity will increase IoT to account for 33% of our revenue.” He expects that figure to rise to 40% in “the coming years”, and for the latest acquisition to add about $65m in annual sales plus “significant revenue growth potential”.

Hurlston added: “Most of our current IoT solutions – whether they are targeted at video streamers, smart home devices, fax and printers, or even automobiles – the end products also need wireless connectivity. Adding this asset to our portfolio enables us to offer a more complete reference design to our customers.”

He also plans to leverage the wireless technologies to move into new IoT segments such as industrial surveillance cameras and home appliances. “This is a greenfield opportunity for us to significantly expand our footprint in what is already a large market today,” he added.

Broadcom, usually seen as an acquirer, has recently become the seller in several deals. It recently offloaded the cybersecurity business of Symantec – a company it acquired in November 2019 for $10.7bn – to Accenture. And in 2016 it sold its first wireless IoT business to Cypress Semiconductor for $550m, but retained sufficient development resource to keep developing a new offering. Hurlston was at Broadcom at the time, and participated in the sale to Cypress. He was hired as Synaptics’ CEO in 2019.

Earlier this year, Broadcom was reported to be trying to sell its RF chip business, potentially to Apple, but is now believed to have decided to hang on to the unit after winning a multiyear deal (also probably with Apple). Broadcom also has a strong WiFi/Bluetooth chip business outside of IoT, and its third wireless division focuses on mixed-signal custom products for smartphones, mainly serving one customer (Apple again, it’s believed).

Meanwhile, ARM plans to transfer two of its IoT Services Group (ISG) businesses – Pelion IoT Platform and Treasure Data – to “new entities” owned and operated by its parent, Softbank.

ARM said the streamlining exercise would enable it to “deepen its focus” on its core semiconductor IP business, though as part of the wider Softbank family, it should still be able to cooperate with the IoT units.

“Softbank’s experience in managing fast-growing, early stage businesses would enable ISG to maximize its value in capturing the data opportunity,” said Simon Segars, ARM’s CEO, apparently oblivious to the recent high profile failures and turmoil within the Softbank Vision Fund. With deep problems in key assets such as WeWork, ARM has emerged as one of the few really solid and valuable companies in the portfolio.

But it has its own priorities to sort out in the 5G world. Segars added: “ARM will be in a stronger position to innovate in our core IP roadmap and provide our partners with greater support to capture the expanding opportunities for compute solutions across a range of markets.”

Some analysts think the reshuffling of assets within ARM is designed to hive off low margin activities and boost its overall profitability and cashflow as a prelude to an IPO (initial public offering). Taking ARM public again would help offset some of Softbank’s recent heavy losses.

Richard Windsor, a City analyst at Radio Free Mobile, told LightReading: “In this environment, ARM might be able to relist at a valuation that will keep Softbank, its shareholders and its partners in the Vision Fund quiet.”

The change of ownership is a reversal of previous strategies instigated both by ARM in its independent days, and then by Softbank. ARM made a series of acquisitions in the IoT space and identified this market as a key source of growth, while Softbank said one of the motivations to acquire ARM was to build a complete IoT stack. In 2018 Rajeev Misra, CEO of Softbank’s Vision Fund, said: “IoT requires an entire stack, not just the chip, and in order to make these investments, you need to sacrifice profits over the next three to five years.”

The Pelion platform was positioned by ARM in 2018 as the industry’s “first end-to-end IoT connectivity, device, and data management platform”, combining technologies from the acquisitions of Treasure Data and Stream Technologies, together with ARM’s own Mbed cloud platform, to offer a single-pane view of all IoT devices and data in an organization.

Given Softbank’s changes in fortunes recently, the idea of sacrificing profits for several years to build a broad IoT business clearly looks less attractive than it did in the heady days of 2018, and milking the ARM crown jewel for profits in its core business, and potentially the revenue from an IPO, will seem like a better route to take.