Avago spends $6.6 billion on LSI’s storage chip business

Avago Technologies Ltd (NASDAQ: AVGO) and LSI Corp. (NASDAQ:LSI) have entered into a definitive agreement under which Avago will acquire LSI for $11.15 per share in an all-cash transaction valued at $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,” according to a statement.

Avago says the combined company will be strongly positioned to capitalize on the growing opportunities created by the rapid increases in data center and mobile data traffic.

Private equity group Silver Lake Partners is supporting the transaction with a $1 billion investment in Avago. Interestingly, it’s not the first time that Silver Lake has invested in Avago.

Avago Technologies was formerly the semiconductor products division of HP, which was separated out as Agilent Technologies and then spun off in 1999. Kohlberg Kravis Roberts & Co (KKR) and Silver Lake bought Agilent's Semiconductor Products Group for $2.6 billion in 2005, and used it to set up Avago Technologies, which they took public in 2009.

However, the private equity firms decided against keeping the storage semiconductor business, which was sold on to PMC-Sierra Inc. (NASDAQ: PMCS) for $425 million in 2005. Now, it appears that Avago wants back into that market.

"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," stated Hock Tan, president and chief executive officer of Avago. "This combination will increase the company's scale and diversify our revenue and customer base."

He added, "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."

"This transaction provides immediate value to our stockholders, and offers new growth opportunities for our employees to develop a wider range of leading-edge solutions for customers," said Abhi Talwalkar, president and chief executive officer of LSI. "Our leadership positions in enterprise storage and networking, in combination with Avago, create greater scale to further drive innovations into the data center."

Avago said the deal would immediately add to the company’s non-GAAP free cash flow and earnings per share. The company forecast annual savings of $200 million in the 12 months ending November 1, 2015, the first full fiscal year after the transaction closes.

Under the terms of the agreement, LSI's stockholders will receive $11.15 in cash for each share of LSI common stock they hold at closing, which is expected to occur during the first half of calendar 2014. Avago intends to fund the transaction with $1.0 billion of cash from the combined balance sheet, a $4.6 billion term loan from a group of banks; and the $1 billion investment from Silver Lake Partners. The investment from Silver Lake is expected to be in the form of a seven year 2% convertible note with a conversion price of $48.04 per share or preferred stock with equivalent economic terms.

Avago says the transaction has been approved by the boards of directors of both companies and is subject to regulatory approvals and customary closing conditions, as well as the approval of LSI's stockholders.

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