Avago Buys Storage Chip Maker LSI For $6.6bn

Avago Technologies, which makes mobile semiconductors used by manufacturers including Apple, Samsung, Intel and Cisco, is to acquire chip maker LSI in a $6.6bn (£4bn) debt-funded deal that is intended to enable Avago to expand into the growing area of enterprise storage, and particularly cloud-based storage.

Avago, which has joint headquarters in Singapore and San Jose, is to pay $11.15 per share for LSI in a cash transaction supported by a $1bn investment from private equity firm Silver Lake. LSI, which is based in San Jose, designs semiconductors and the accompanying software for accelerating storage and networking in data centres, mobile networks and client systems.

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Other funding includes a $4.6bn term loan from a group of banks and $1bn of cash in hand, according to Avago.

The deal represents a 41 percent premium to LSI’s Friday closing price. LSI’s chips are used in storage products including hard disks and flash drives.

Avago said it plans to help save $200m in annual costs by the end of the fiscal year ending 1 November 2015 by combining the two companies. The combined company will become one of the top five semiconductor manufacturers.

Avago and LSI said they see strong compatibility and low overlap between the two companies, since Avago focuses on wired and wireless networking, while LSI’s area is wired networking and storage. The deal is designed in part to help Avago take advantage of the boom in cloud-based storage. Avago currently provides analogue, mixed-signal and optoelectronic components and subsystems to more than 40,000 customers.

Due to the low overlap between the two companies’ businesses, the combined company is projected to see revenues of about $5bn, or roughly the same as the combined revenues of the company prior to the merger. Avago had 2012 revenues of $2.4 billion, compared to $2.5bn for LSI.

Diversification

About one-half of the combined company’s income will come from networking, more than one-third from storage and the rest will be made up of income from industrial and embedded semiconductors.

“This combination will increase the company’s scale and diversify our revenue and customer base. In addition to these powerful strategic benefits, as we integrate LSI on to the Avago platform, we expect to drive LSI’s operating margins toward Avago’s current levels, creating significant additional value for stockholders,” said Avago chief excutive Hock Tan in a statement.

LSI president and chief executive Abhi Talwalkar said the deal provides immediate value to shareholders as well as future growth opportunities.

Avago was formerly the semiconductor arm of HP, which Silver Lake helped to spin off and take public in 2009 in a successful deal. Silver Lake no longer holds an investment in the company but retains a seat on its board.

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