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Avago to pay $6.6B for LSI acquisition

18 Dec 2013

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Avago Technologies has expressed interest in acquiring LSI Corp. in a bid to strengthen the two companies' position in the semiconductor industry and to save up to $200 million annually. The consolidation, which is valued at $6.6 billion, will be funded through $1 billion in cash, a $1 billion loan from private equity firm Silver Lake Partners and a $4.6 billion loan from a group of banks.

Overall, the combination is a wise move that Wall Street is already giving a thumbs-up with increased stock prices for both companies. It also is a sign of slowing growth and increasing risk aversion in the maturing market for semiconductors.

The two companies have little product overlap and some potential for product and technology synergy. LSI brings a significant business in storage, primarily hard-disc-drive chips, storage networking boards, and solid-state drive controllers. Avago does about half its business in various handset and basestation RF chips and the rest in a mix of mainly optical components.

The net result is a company with a significantly broader product portfolio that aims to save as much as $200 million a year by rationalising so-called selling, general, and administrative expenses. Avago chief executive Hock Tan praised the LSI product line and said it was premature to comment on any potential of product-line cuts or other cost savings.

There's "some overlap in ASIC and SerDes, so I'd expect reduction in force for greater efficiencies, but the combined company will have more IP for ASICs, too," says Jag Bolaria, senior analyst with market watcher The Linley Group of Mountain View, Calif.

"LSI is currently riding high," Bolaria told us. "It has managed to expand its ASIC footprint because of limited competition in traditional ASSP markets—so it's a good time for an exit."

Overall, Avago estimates its annual revenue growth could slow from its current level of as much as 12 per cent down to as little as 6 per cent due to the deal. However gross margins, earnings per share, and cashflow will all increase.

The deal also gives both companies bigger shock absorbers. For example, Avago will reduce its exposure to volatile wireless markets, shifting that portion of its business from 50 per cent to 25 per cent of its sales.

"Avago has not been a player in enterprise storage until now... [but the deal] makes us a leader overnight," said Tan on a call with analysts.

The two companies could see synergies by increasing collaboration with shared customers in datacenter, carrier, and business network systems. The move plays into the trend of chip buyers' increasing interest in working more closely with fewer key vendors. In addition, the combination of Avago and LSI optical, silicon, and SerDes capabilities could fuel work in complementary products in and around their network processor products.

Avago hopes to close the deal before July. The merger promises to create a company with "greater scale for investment and a broader product portfolio in a larger, more diversified organisation," said Abhi Talwalkar, chief executive of LSI on the analyst call.

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