Leading analog semiconductor manufacturer
Avago Technologies Limited
) recently inked a definitive agreement to acquire
) for $6.6 billion in cash. The strategic move is aimed to
diversify Avago's existing business line from wired
infrastructure, wireless and industrial businesses into the
storage chip market in order to augment its revenues, as the
industry braces for more consolidation amid challenging
The all-cash transaction will be funded by a combination of $1.0
billion cash in hand, $4.6 billion term loan from a consortium of
banks, and $1.0 billion investment from private equity firm
Silver Lake Partners. The purchase price equates to a cash
payment of $11.15 for each LSI share, representing a premium of
about 41% on its closing price of $7.91 on Friday - the day
before the deal was announced.
The announcement cheered investor sentiment as LSI shares jumped
38.6% to close at $10.96 on Dec 16. Even Avago shares, which were
up 42.7% so far this year till Friday, rose 9.8% following the
announcement of the deal. The transaction is expected to be
complete by the first half of 2014, subject to regulatory
approvals and fulfillment of customary closing conditions.
With annual revenues of approximately $5 billion, the combined
company is expected to be one of the behemoths in the
semiconductor industry offering a complementary yet diversified
product portfolio to a wider range of customers. Leveraging on
economies of scale, the transaction will facilitate Avago to
benefit from rapid increases in data center IP and mobile data
traffic, and will position it to be an undisputed leader in the
enterprise storage market.
In addition to cost synergies from a combined resource pool as
the cost of designing and building semiconductors rises, the
acquisition is likely to improve the operating margin of the
combined company, creating greater scale to further drive
innovation into the datacenter. The transaction is expected to be
accretive to Avago's free cash flow and recurring earnings with
an immediate effect, leading to annual cost savings of $200
million by fiscal 2015.
The acquisition is the second-largest transaction of its kind in
the industry this year, following the purchase of
Tokyo Electron Ltd
Applied Materials, Inc.
) for $9.6 billion. Whether the current deal is a precursor to
several such deals in the semiconductor industry is too early to
speculate. However, the combination of two complementary
businesses in Avago and LSI is worthy to take note and might
encourage other rival companies to take a similar plunge to gain
With an expertise in compound semiconductor design and
processing, Avago is a premier designer, developer and global
supplier of a broad range of analog, mixed signal and
optoelectronics components and subsystems. The company boasts
over 4,200 patents serving three primary target market segments:
wireless communications, wired infrastructure, and industrial and
other. Avago presently has a Zacks Rank #3 (Hold).
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