Acquisition MachineNarrow moat

Broadcom's management runs one of the most effective acquisition playbooks in all of technology, and it is worth understanding as a discipline in its own right, because it is really the engine of the company's remarkable returns. The strategy is deceptively simple to describe and very hard to execute: buy an established business with entrenched customers, focus ruthlessly on the most profitable among them, cut away everything that does not earn its keep, and let the resulting cash flow. Applied again and again to well-chosen targets, it has compounded value at a rate few operating companies can approach.

The skill begins with target selection, which is where most acquisitive companies go wrong. Broadcom buys businesses with genuine moats — franchises whose customers are entrenched and cannot easily leave — rather than chasing growth or fashion. It is precisely because the targets have durable competitive positions that the rest of the playbook works: you can raise prices and cut costs on a business whose customers are locked in, whereas the same treatment applied to a business without a moat would simply drive the customers away.

Once a business is acquired, the ruthless focus begins. Broadcom pares the acquired company down to its most profitable core — keeping the best customers and products, shedding the rest, and stripping out costs with a rigor that can be jarring to those accustomed to gentler ownership. The aim is not growth for its own sake but the maximization of durable cash flow, and the willingness to shrink a business to make it more profitable is a discipline that eludes most managers, who instinctively equate size with success.

Underpinning the whole is a discipline about price and integration. Broadcom pays a sensible price rather than overpaying in a bidding war, and it integrates its acquisitions without sentiment, moving quickly to capture the value it identified before buying. This combination of buying well and integrating hard is what separates a value-creating acquirer from the many that destroy value by overpaying for businesses they then fail to improve.

The cumulative effect is a machine for turning acquisitions into free cash flow, run by people who think like the owners they in large part are. It is closer in spirit to disciplined capital allocation than to conventional technology management, and it has made Broadcom a serial compounder of shareholder wealth. The one caution worth holding in mind is that a playbook built on raising prices on captive customers depends on those customers staying captive — a moat that must be respected even as it is exploited, lest the exploitation itself, pushed too far, become the thing that erodes it — a risk that grows with each of the five major platforms bolted on since 2013¹.