Never wonder, always know: comprehensive checks for new business partners


Financier Worldwide Magazine

February 2014 Issue

February 2014 Issue

Avago Technologies Limited announced in December that it had agreed to acquire storage and networking company LSI Corporation for $11.15 per share in an all cash transaction valued at $6.6bn. 

The agreed price represents a 40 percent premium on San Jose, California based LSI’s closing price of $7.94 the day before the deal was announced. Both companies expect the transaction to complete in the first half of 2014. 

The acquisition of LSI provides Avago with a strong position in the much coveted storage chip market. LSI offers hardware equipment for data centres, including flash storage, network processors, controllers and other products. Once the deal has been completed, Avago, which designs and develops analogue-semiconductors for a customer base including companies such as Apple Inc, Samsung Electronics Co Ltd, LG Electronics Inc and Huawei Technologies Co Ltd, will receive around 38 percent of its revenue from its new enterprise storage business. The newly combined company which will continue to operate from dual headquarters in Singapore and San Jose, California will enjoy annual revenues in the region of $5bn. Avago also expects to achieve synergies of around $200m in cost savings in the 12 months ending 1 November 2015, the first full financial year after the transaction closes. Avago hopes that the newly combined company will have long-term revenue growth rates of between 6 and 8 percent, with earnings per share growing in the double digits. 

According to a joint statement announcing the deal, Avago will pay $1bn in cash and will utilise a $4.6bn bank loan. A group of banks have underwritten the significant seven year term loans with a variable, blended interest rate of around 3.5 percent. Under the terms of the deal Avago will also receive a $500m revolving credit line that will be undrawn, according to securities documentation filed by the company. 

Private equity firm Silver Lake Partners will also provide a $1bn investment toward the all cash purchase. In 2005, Silver Lake and fellow PE firm KKR & Co LP, carved out Avago from Agilent Technologies Inc in a $2.66bn deal. Six years earlier, Agilent itself had separated from parent company Hewlett-Packard. In turn, Silver Lake took Avago public in 2009, selling the last of its stake in the company in 2012; in total the firm saw returns of approximately five times its initial $1bn equity investment, a figure believed to be one of the most lucrative in Silver Lake’s history. 

Although the sale of LSI to Avago has been approved by the board of directors of both companies, at the time of writing the deal is still subject to regulatory approvals across various jurisdictions as well as other customary closing conditions. LSI’s stockholders are also still to authorise the sale. In a joint statement Abhi Talwalkar, president and chief executive officer of LSI, said “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. Our leadership positions in enterprise storage and networking, in combination with Avago, create greater scale to further drive innovations into the data centre.” 

The acquisition of LSI is representative of the largest ever purchase made by Avago, which was founded in 1961 as an electronics division of HP. The deal was also the second-largest announced in the semi-conductor industry in 2013. The only other deal to surpass the Avago/LSI transaction was the successful acquisition of Tokyo Electron Ltd in September 2013 by Applied Materials Inc. The purchase of Tokyo Electron was also an all-stock transaction valued at more than $7bn. 

“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,” said Hock Tan, president and chief executive of Avago. “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.”

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Richard Summerfield

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