BROADCOM
When you think of the largest tech companies in the world, what names come to mind? Probably Apple, Microsoft, Google, Nvidia, Amazon, and Meta right? Well, what about Broadcom? Did you know that Broadcom is currently the 9th largest tech company in the world? In fact, they boast a market cap of $570 billion.
Broadcom has been one of those background companies that has grown way larger and way more powerful than anyone realized. I mean, just take a look at their stock graph, it’s basically a rocket ship having grown 74X since late 2009 alone.
For perspective, even Apple has only grown 32x during that time period, and it’s the same story with the rest of big tech as well. Microsoft only grew 17x, Google only grew 13x, and Facebook has only grown 10x.
The only big tech company that has really outshined Broadcom in terms of growth is Nvidia whose stock graph is an even bigger rocket ship having grown 177x during the same time period. But, there’s one massive difference between Nvidia and Broadcom.
For quite some time now, Nvidia has been involved in multiple super hyped-up industries whether it be crypto mining, self-driving cars, or most recently language models. Apple literally created the iPhone, and Google, Facebook, and Microsoft created or acquired services that are used by billions of people.
But Broadcom on the other hand? Well, that’s as boring and background as it gets. That’s why they’ve been able to grow to nearly being a top 10 company without the general public noticing. But, that doesn't mean that you should take Broadcom lightly.
Broadcom estimates that 99% of all internet traffic across the entire world passes through at least one Broadcom chip, and they’ve produced quite a few skeletons to get to that point. In fact, just recently, they completed their acquisition of VMWare for $69 billion which has turned into one of the most controversial acquisitions within the tech world.
So, here’s what you need to know about Broadcom, the truth about how it got so large, and why people in the know are so worried about Broadcom.
MAKING A NAME
Taking a look back, Broadcom has been somewhat Making A Name of a dark horse within the tech industry since the very beginning way back in 1961. One of the main reasons for this is that Broadcom was never some sort of humble startup that was cherished by its consumers at any point in time. Rather, they were started in the shadows and they stayed in the shadows.
You see, Broadcom was originally started as a division within HP in 1961 called HP Associates. 1961 was very much the Stone Age when it comes to the tech world, but by this point, HP had already made a name for itself having been in business since 1939.
They were known for making cutting-edge audio oscillators and radar technology that were famously used by Disney and the US military during World War 2 respectively. As such, Broadcom, or HP Associates, was launched with a great pedigree and plenty of resources, but for the first 30 years, you wouldn’t have even known that they existed.
In fact, Broadcom’s own corporate history page only has a few bullet points describing the first 30 years of business which really just centers on 3 inventions. The first of these inventions was gallium arsenide phosphide LEDs. These LEDs are what you see at traffic lights and big LED signs.
Their second invention also had to do with LEDs. They were the ones who created the world’s first commercially available LED dot matrix displays. And lastly, moving into the 1970s, they also created the first fiber optic transmitters and receivers.
These 3 inventions provided them with plenty of business behind the scenes especially when combined with the brand image of HP. But, this is not what really made Broadcom into what it is today. For that, we have to fast forward to the early 1990s to the early days of the internet.
You see, while all of the VCs and entrepreneur hopefuls were piling into the internet space hoping to make it big, one professor-student pair named Henry Samueli and Henry Nicholas at UCLA decided to sell the shovels.
If the internet was truly gonna become the next big thing, everyone was surely gonna need a way to connect and get access to the network, and this is precisely what this duo would address. Together they founded a small private company called Broadcom in 1991 and they began developing integrated circuits that made the internet.
If you’ve ever wondered how in the world it was possible to get an internet connection using cable TV lines, well, you can thank these guys. Unlike HP Associates, these guys didn’t really have a reputation or connections. It was really just the quality of their invention that did all the talking.
Their first few customers themselves included the likes of Time Warner, Rockwell International, Analog Devices, and even the US Air Force. These customers alone would provide Broadcom with over $5 million in annual revenue and attract the attention of Intel who would loan the company another $5 million.
And if you’re wondering what all the hubbub was about, then I think these numbers will really put things in perspective. At the time, phone-based internet offered speeds of up to 28.8 kilobits per second. Broadcom's cable-based solutions on the other hand offered speeds of up to 1000 times that.
And they would soon move over to revolutionizing the phone internet space as well. Hearing all this, you’re probably wondering where all the controversy is. So far, this is really just a feel-good story about ingenuity and innovation that made the whole internet what it is today.
And it definitely could’ve been exactly that, but pretty soon, our professor-student duo would lose their way after seeing big dollar signs.
A DARK HORSE
By 1998, Broadcom would grow to 11,750 employees across 15 countries and they would go public with an insanely successful IPO that made the founders into centi millionaires.
They could’ve just held onto their stakes for the long term and they would’ve become deca billionaires but what they wanted was a larger portion of the pie leading us into one of the biggest stock scandals of the era: options backdating.
Options backdating was an extremely prevalent scandal throughout the late 90s and early 2000s and it involved the likes of Apple, UnitedHealth Group, Staples, The Cheesecake Factory, KB Homes, Monster, and of course Broadcom.
How does it work?
Well, it was all due to one misguided accounting rule that was implemented in 1972. The rule permitted companies to avoid disclosing executive compensation if it was in the form of stock options. This wasn’t a big deal at the time or for the next 25 years really because stock options weren’t nearly as popular back in the day.
But that would all change with the rise of dot-com companies. All of sudden, billion-dollar fortunes were being minted overnight thanks to stock compensation. So, naturally, stock compensation became far more desirable than cash compensation, and pretty soon these executives would discover a loophole within the law.
Given that companies didn’t have to disclose stock option grants to investors at the time in which they were granted, the whole system essentially ran off the honor system. It was up to the executives to be honest about how much stock compensation they received and when.
But let’s just say that a lot of tech executives weren’t exactly honest. Essentially, they would team up with their executive buddies and create false paperwork that made it seem like they all received a bunch of stock grants 5 years ago when the stock was 50 times cheaper.
And it was now up to the investors to pay out these massive compensations through the form of stock dilution. This practice would end up costing investors over $10 billion, $2.2 billion of which was “allegedly” due to none other than Broadcom.
After these revelations came to light, both founders would step away from the company but they were never really held accountable. The cases against them would eventually be dropped due to “prosecutorial misconduct” and Broadcom would end up settling for just $160 million.
Both founders would end up walking away as deca billionaires but this scandal would forever stain Broadcom and turn them into the dark horse that they are today. After this massive scandal, Broadcom very much needed a way to reset and move forward and this is where the other half of Broadcom would come into play.
Remember how we started off this story talking about HP Associates? Well, this is where they would become relevant. Right before the turn of the century, HP Associates would break off from HP and become a new company called Agilent Technologies.
This company would then be purchased by KKR and Silver Lake Partners in 2005 for $2.7 billion, creating a new company called Avago Technologies. Avago lurked around the shadows of the tech world for the next decade before they finally made their big move in 2015.
They would agree to move forward and acquire the entirety of the stained Broadcom for $37 billion bringing us into the modern-day Broadcom.
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A SHADOW GIANT
Honestly, there’s really nothing good A Shadow Giant says about the modern Broadcom which is such a shame. These guys are literally responsible for creating the tech that makes the modern internet possible, yet their behavior really makes it hard to root for them.
For starters, it appears that they're patent trolls. In 2017, for example, they sued smart TV makers for patent infringement. And in 2020, they sued Netflix also for patent infringement. However, the tech community at large just views these lawsuits as Broadcom suing because they're jealous.
Even the judge who was ruling on the case said quote “You’re killing me” calling the filings “massive overkill”. But, their patent tantrums are the least of your worries. The far bigger issue is that Broadcom controls the entire internet chip market.
Calling them a monopoly is honestly understating the situation. Again keep in mind, according to Broadcom themselves, 99% of all internet traffic passes through their chips, so basically every company that you can think of in the entire world is reliant on Broadcom, and I’m not just talking about tech companies.
Broadcom has Fortune 500 customers in all of these industries. And let’s just say Broadcom is very much a predatory service provider for these customers. You know, things like predatory contracts, retaliation on nonloyal customers, exclusivity arrangements, and so on.
I mean, you can’t feel too bad for these Fortune 500 customers because they usually turn around and do the exact same thing to us, but the point still stands that Broadcom is very much a toxic force within the tech world.
They control an invention that basically everyone needs and they leverage that to the max. And more recently, they’ve been looking to expand their monopoly to adjacent sectors. In 2017, for example, they would attempt a hostile takeover of the mobile chipmaker Qualcomm for $105 billion.
The only reason this deal didn’t go through is because President Trump would block it. But, it’s not like Broadcom was really all that upset about it because they would just move on to their next acquisition target.
In mid-2018, for example, Broadcom would go ahead and purchase CA Technologies, a tech infrastructure giant, for $18.9 billion in cash. Most recently, they completed their acquisition of VMWare for $69 billion.
Every time Broadcom completes an acquisition, they make sure to spread their toxicity, and that’s why much of the tech community has basically just accepted that VMWare is basically dead. It’s very similar to what GE was doing back in the 80s and 90s but instead of it happening in the industrial world, it’s happening in the tech world.
And honestly, the only way that this will likely end is by Broadcom becoming so big and so toxic that they crumble from the inside out. Until then though, they’re very much a force to be reckoned with and that is the truth about Broadcom.
