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AT&T and DirecTV Merger – Positive for MaxLinear and Neutral for Broadcom

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By on S&P 500, Technology & Software

On Sunday, AT&T and DirecTV announced that they have entered into a definitive agreement under which AT&T will acquire DirecTV in a stock-and-cash transaction. With this merger, we believe AT&T will be able to offer a stronger triple play offering (video, wireless, and broadband) that can take on the dominance of the cable industry (on the video and broadband front). From our point of view, the merger will be positive for MaxLinear and neutral (to slightly negative) for Broadcom.

We believe AT&T will rely on the lower-cost satellite deployment over its higher-cost fiber deployments when deploying video services and acquiring customers. In addition, with 20 million satellite customers in the United States (versus roughly 5 million UVerse customers), we believe AT&T will benefit from DirecTV’s larger geographic deployment and scale. Given MaxLinear’s significant technology advantages in the satellite outdoor unit (ODU), and validated by our belief of design wins across the major satellite providers (DISH [DISH $59.95], BSkyB, and DirecTV), we believe MaxLinear’s addressable market will expand with the merger. Bottom line, with no presence at AT&T’s UVerse deployment and little satellite revenue contribution, we believe MaxLinear will now be exposed to a bigger market (larger AT&T customer base) in its deployments. We maintain our Outperform rating on MaxLinear.

For Broadcom, we believe the company is strongly positioned as an incumbent supplier at AT&T and a strong player on the satellite front with DIRECTV. Consequently, we do not believe this merger will have any impact on the company’s business in the near term. Still, longer term, we are inclined to believe that the consolidation of the combined AT&T and DirecTV entity will have incrementally stronger purchasing power over its supply chain, which, in turn, would be a headwind to Broadcom. We maintain our Market Perform rating on Broadcom.

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