Avago Will Buy LSI for $6.6 Billion to Gain Storage Chips

Avago Technologies Ltd. (AVGO), a chip manufacturer that began as a unit of Hewlett-Packard Co. (HPQ), agreed to buy LSI Corp. (LSI) for $6.6 billion, gaining semiconductors for disk drives and other electronics.

Avago will pay $1 billion in cash and use a $4.6 billion bank loan, the companies said in a statement today. Silver Lake Partners, a private-equity firm that helped acquire Avago before its initial public offering in 2009, will provide a $1 billion investment toward the all-cash purchase.

LSI and Avago may be combining to gain more resources as the cost of designing and building semiconductors rises, potentially heralding a wave of deals in the industry, said Suji De Silva, an analyst at Topeka Capital Markets Inc. Packaged together, some of the companies’ storage products may be more attractive to large Internet data-center operators, such as Google Inc., he said.

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

LSI jumped 39 percent to $10.96 at the close in New York. The shares of the Milpitas, California-based company had gained 12 percent this year before the acquisition was announced. Avago, whose stock was up 44 percent for the year before today, rose 9.7 percent to $50.10.

Semiconductor Deals

The transaction marks the year’s second-biggest deal for the semiconductor industry, following the $9.4 billion acquisition of Tokyo Electron Ltd. (8035) by Applied Materials Inc. (AMAT) in September. Avago’s purchase of LSI would create a business with about $5 billion in annual revenue and provide Avago with a range of storage chips that it can sell to data-center customers. Avago, which operates dual headquarters in Singapore and San Jose, California, also expects to get $200 million in yearly cost savings.

“They will be a strong enterprise storage player,” said Hans Mosesmann, an analyst at Raymond James & Associates Inc. “In this day and age, as things consolidate, the bigger guys are going to have more power.”

LSI’s stockholders will receive $11.15 in cash for each share of LSI common stock at the completion of the deal, which is expected in the first half of 2014, according to the statement. The transaction will boost Avago’s free cash flow and earnings per share immediately after it closes, the company said.

“This combination will increase the company’s scale and diversify our revenue and customer base,” Hock Tan, Avago’s chief executive officer, said in the statement. “As we integrate LSI onto the Avago platform, we expect to drive LSI’s operating margins toward Avago’s current levels.”

Hewlett-Packard Unit

The purchase would be the largest deal for Avago, which was founded in 1961 as an electronics division of Hewlett-Packard. It pioneered the market for light-emitting-diode displays before expanding into fiber-optic transmitters, optical mouse sensors and other equipment. It then became part of the Agilent Technologies Inc. spinoff from Hewlett-Packard in 2000.

In 2005, a group of private-equity firms, including Silver Lake and KKR & Co. (KKR), acquired the business for $2.66 billion. They orchestrated an IPO for the company, which debuted on the Nasdaq Stock Market in 2009.

Deutsche Bank AG advised Avago on the transaction, while Qatalyst Partners LLC assisted LSI.

To contact the reporters on this story: James Callan in New York at jcallan2@bloomberg.net; Nick Turner in San Francisco at nturner7@bloomberg.net

To contact the editors responsible for this story: Nick Turner at nturner7@bloomberg.net; Pui-Wing Tam at ptam13@bloomberg.net

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