Wheelings & Dealings: Avago Technologies Acquires LSI for $6.6B as Company Diversifies into Storage Chips

In a closely watched acquisition, Avago Technologies plans to acquire LSI Corp for $6.6 billion in an all-cash deal.

It is believed to be the second-biggest deal this year in the semiconductor field, after Applied Materials’ (News - Alert) $9.4 billion acquisition of Tokyo Electron.

The Avago deal will be paid for by a $4.6 billion term loan through banks and a $1 billion investment from Silver Lake Partners. The acquisition is expected to close in the first half of next year. The deal was already approved by the boards of directors of both companies. It still needs regulatory approvals and the approval from LSI’s stockholders.

LSI designs software and semiconductors that speed up storage and networking. The products are used in data centers, mobile networks and in client computing. “LSI focuses on making chips that control networks, especially storage for data centers,” according to a report from The New York Times. Last year’s profits at the company were $196.2 million, while revenue last year was $2.5 billion.

Avago benefits from the acquisition by getting a more diversified semiconductor company. And with the deal, it will be able to sell storage chips to data center customers, news reports said. Avago previously has focused on network infrastructure, mobile devices and industrial sectors. Its current customers are Cisco, HP and Samsung (News - Alert).

“The combined company will be strongly positioned to capitalize on the growing opportunities created by the rapid increases in data center IP and mobile data traffic,” according to a company statement.

Avago also predicts it will earn some $5 billion in yearly revenues after the deal.

“This highly complementary and compelling acquisition positions Avago as a leader in the enterprise storage market and expands our offerings and capabilities in wired infrastructure, particularly system-level expertise,” Hock Tan, president and CEO at  Avago, added in the statement. “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 onto the Avago platform, we expect to drive LSI’s operating margins toward Avago’s current levels, creating significant additional value for stockholders.”

In an analysis of the deal, Suji De Silva, an analyst at Topeka Capital Markets, speculated the acquisition could be a signal of future deals in the sector.

Also, their combined storage products could become “more attractive to large Internet data-center operators, such as Google (News - Alert),” Bloomberg reported, based on De Silva’s comments.

“The question is whether this is the beginning of a consolidation trend in semiconductors -- scale does make sense,” De Silva added. “This clearly extended that data-center footprint.”

LSI stockholders will receive $11.15 for each share of common stock they hold at closing.

In total, Silver Lake already manages approximately $20 billion in combined assets.

“We are pleased to renew our highly successful partnership with Hock Tan and the Avago management team,” Kenneth Hao, a managing partner at Silver Lake, said in a statement. “We believe this is a strategically compelling transaction that creates a tremendous opportunity in the enterprise storage and networking markets, and will position Avago as one of the global leaders in the semiconductor industry.”

Avago traces its roots to 1961 when it was started as an electronics division of Hewlett-Packard (News - Alert).