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Broadcom Bets on Net Traffic With $3.7 Billion NetLogic Deal

Broadcom Bets on Net Traffic With $3.7 Billion NetLogic Deal
Broadcom is paying 69 percent more than NetLogic’s average stock price over the 20 trading days before the announcement, according to Bloomberg data. Photographer: Susan Goldman/Bloomberg

Broadcom Corp. plans to spend $3.7 billion on chipmaker NetLogic Microsystems Inc. to benefit from surging demand for networking equipment that delivers video and Web access to mobile devices.

NetLogic investors will get $50 a share, a 57 percent premium to the closing price for the Santa Clara, California-based company on Sept. 9, Broadcom said in a statement.

Customers such as Huawei Technologies Co. and ZTE Corp. use NetLogic processors in the equipment that controls the flow of video and other data across the Internet. The deal gives Broadcom, which also makes chips for mobile handsets, a more profitable way to harness the boom in tablets and smartphones, said Stacy Rasgon, an analyst Sanford C. Bernstein & Co.

“Strategically it makes a lot of sense,” said Rasgon, who is based in New York and has a “market perform” rating on Broadcom. “The one thing that’s going to throw people is the price.”

NetLogic had a gross margin -- or portion of revenue remaining after deducting the cost of sales -- of 55 percent last year, topping Broadcom’s 52 percent.

Shares Surge

NetLogic jumped $16.21, or 51 percent, to $48.12 at 4 p.m. New York time on the Nasdaq Stock Market. Shares of Broadcom, based in Irvine, California, fell 38 cents to $33.06. The stock has lost 24 percent this year.

Both boards have approved the deal, and the companies expect it to close in the first half of 2012.

Broadcom said the acquisition will boost its 2012 earnings per share, excluding some items, by 10 cents. The company also reiterated its financial targets for this quarter.

Broadcom, which makes chips for Samsung Electronics Co. and Nokia Oyj mobile phones, said the purchase more than doubles its potential market in network equipment, Chief Executive Officer Scott McGregor said in a telephone interview. NetLogic has increased sales for at least eight consecutive years as soaring Internet traffic boosted demand for wireless-network equipment.

Networking equipment made up only about 23 percent of Broadcom’s sales last year. The company also sells semiconductors used in set-top boxes, Apple Inc.’s iPad and routers used to create hot spots in people’s homes.

Big Premium

Broadcom is paying 69 percent more than NetLogic’s average stock price over the 20 trading days before the announcement, according to Bloomberg data. The average premium for about 135 similar deals was 25 percent over the past five years, according to Bloomberg data.

“The premium is fair,” said McGregor. “This acquisition expands our market into additional networking opportunities.”

Sales of smartphones surged 74 percent to 107.7 million devices worldwide in the second quarter of 2011, compared with the same period a year earlier, according to a report last month from Gartner.

NetLogic’s processors can recognize what type of data is passing through a switch and prioritize traffic to make a network run faster and more efficiently. Broadcom will sell NetLogic’s chips along with its own products to makers of switches and routers that direct the flow of information.

The deal is the fourth-largest acquisition of a U.S. chipmaker in the past five years, and the second-largest this year after Texas Instruments Inc. agreed to buy National Semiconductor Corp. for about $6.5 billion in April, according to Bloomberg data.

NetLogic was advised by Qatalyst Partners, and Bingham McCutchen LLP was the legal counsel. Broadcom was advised by the law firm Skadden, Arps, Slate, Meagher & Flom LLP.

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