Broadcom Is One Pricey Chip Target as Avago Seals Deal: Real M&A

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Chipmakers aren’t coming cheap these days.

Avago Technologies Ltd. said Thursday that it’s buying Broadcom Corp. for about $37 billion. Under the terms of the deal, Broadcom investors can choose to receive $54.50 a share in cash, or stock, or a combination of the two.

The cash option values Broadcom at about 24 times its earnings before interest, taxes, depreciation and amortization in the last year. That’s more than 70 percent higher than the median multiple paid in recent chipmaker deals.

“It is a high premium to pay for a company suffering slow growth,” Erik Gordon, a professor at University of Michigan’s Ross School of Business, wrote in an e-mail. “Broadcom shareholders have more to cheer than Avago’s.”

The industry’s last big announced acquisition -- NXP Semiconductors NV’s planned purchase of Freescale Semiconductor Ltd. for $16.7 billion including debt -- values the target company at about 16 times Ebitda, according to data compiled by Bloomberg. That’s also higher than the median multiple of 14 paid for chip targets in the past five years, the data show.

Broadcom on Wednesday surged 21 percent to $57.16 on the prospect of a deal. For some investors, that means taking $54.50 in cash from Avago would result in a loss. But Avago also climbed on Wednesday.

It’s a prime time for Broadcom to be selling. Even before Wednesday’s gains, the company’s shares were near a nine-year high and had climbed 9 percent year to date.

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