The deals are getting bigger. In December, optical components developer Avago Technologies agreed to buy semiconductor and software company LSI in a cash deal worth $6.6 billion.
The acquisition creates a “highly diversified semiconductor market leader with approximately $5 billion in annual revenues by adding enterprise storage to Avago’s existing wired infrastructure, wireless and industrial businesses,” the company said in a statement.
The combined company intends to capitalize on the growing opportunities created by the rapid increases in data centre and mobile data traffic.
“The semiconductor market is changing quickly with the onslaught of the cloud model,” said Karen Liu, principal analyst, components, for Ovum, who believes that the amalgamation will help the two companies be more responsive to change.
The two vendors have very little product overlap, but can pool resources to innovate more quickly, she says. For instance, Avago’s expertise in high-speed connectivity, specifically SerDes, will be help to differentiate LSI’s custom and standard networking silicon as speeds increase; while LSI’s systems and software capabilities could be used to extend Avago’s custom chip offerings.
Nevertheless, Liu described the deal between two companies with multi-billion dollar revenues as a “bold move”. “It moves the company [Avago] further from the cluster of smaller (US$1 billion revenue or below) communication semiconductor vendors such as Applied Micro, PMC-Sierra, Cavium and into a cluster with Broadcom (US$8 billion annual revenue) and Freescale (US$4 billion),” she wrote in a research note.
The acquisition will be funded by a combination of $1.0 billion cash from the company balance sheet, $4.6 billion of fully committed term loans, and a $1.0 billion investment from Silver Lake Partners.
This will be the second time Silver Lake has invested in Avago. In 2005, Kohlberg Kravis Roberts & Co (KKR) and Silver Lake bought Agilent’s Semiconductor Products Group for $2.6 billion, and used it to set up Avago Technologies, which they took public in 2009. Interestingly, at the time the private equity firms decided not to keep Avago’s storage semiconductor business, which was instead sold to PMC-Sierra for $425 million.
LSI’s stockholders will receive $11.15 in cash for each share of LSI common stock they hold at closing, representing a 41% premium over the company’s share price on 13 December when the deal was announced. The deal is expected to close in the first half of 2014, subject to customary closing conditions.
By Pauline Rigby
Press release: Avago Technologies to Acquire LSI Corporation for $6.6 Billion in Cash
Ovum Analyst View: Avago raises networking stake with LSI acquisition