LSI Acquired by Avago for $6.6 Billion, in Cash and Loans

Most surprising deal of year and probably of storage history

This is a Press Release edited by StorageNewsletter.com on December 17, 2013 at 3:08 pm

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Highlights

Silver Lake Partners to support transaction with $1 billion investment in Avago
Positions Avago as a leader in enterprise storage
Expands market position and brings valuable system-level expertise in wired infrastructure
Diversifies revenue and scales up Avago across multiple attractive end markets
Immediately accretive to Avago free cash flow and EPS on a non-GAAP basis
$200 million of annual operating synergies expected by the end of fiscal year 2015

Avago Technologies Limited and LSI Corporation 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 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. The combined company will be strongly positioned to capitalize on the growing opportunities created by the rapid increases in data center IP and mobile data traffic.

“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 CEO, 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.”

“This transaction provides immediate value to our stockholders, and offers new growth opportunities for our employees to develop a wider range of solutions for customers,” said Abhi Talwalkar, president and CEO, LSI. “Our leadership positions in enterprise storage and networking, in combination with Avago, create greater scale to further drive innovations into the datacenter.”

The transaction is expected to be and immediately accretive to Avago’s non-GAAP free cash flow and earnings per share. Avago currently anticipates achieving annual cost savings at a run rate of $200 million by the end of the fiscal year ending November 1, 2015, the first full fiscal year after closing.

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 and fully-committed financing from the following sources:

$4.6 billion term loan from a group of banks; and
$1 billion investment from Silver Lake Partners, which 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.

The transaction has been approved by the boards of directors of both companies and is subject to regulatory approvals in various jurisdictions and customary closing conditions, as well as the approval of LSI’s stockholders.

Comments

It is one of the most surprising and acquisition of the year and at the same time, at 6.6 $billion, one of the highest deal in the storage history. More than $6 billion M&As in Storage Industry

Year	Buyer	Acquired company	Price in $ billion
2001	Compaq*	HP	25.0
2005	Veritas	Symantec	11.0
2011	Autonomy*	HP	10.3
1998	Digital Equipment*	Compaq	9.6
2009	Sun*	Oracle	7.4
2013	Avago	LSI	6.6

* Company not only in storage This year, the highest amount paid in storage was $695 million by WD to get Virident and $6.6 billion is more than the global amount of all known storage acquisitions in 2012, $6.9 billion. LSI and Avago were discussing since six months with Silver Lake, but the secret was well kept. Even if we have heard about this rumor, we couldn't publish it because this deal was unbelievable as Avago is not known at all in the storage indusry. On the more than 31,000 news published on StorageNewsletter.com since 2007, only three concerned Avago's products, about ... FC and fiber-optic transceivers. And the buyer never was in enterprise storage. We could understand that Intel, Broadcom, SanDisk, Seagate or WD could be interested by LSI, not Avago. For sure, both Avago and LSI are members of the worldwide chip market that is consolidating following the deal, but for completely different applications. And LSI has other activities, not just chips. $6.6 billion is not a small price to get LSI, 2.8 times the annual revenue of the acquired firm and a 41% premium over its stock price. LSI's market cap jumps from around $4.3 billion to reach now $5.97 billion. Who is Avago? It's a Singapore-based chip manufacturer, with also HQs in San Jose, CA, that was founded in 1961 as an electronics division of HP. Avago turned already to Silver Lake to finance this deal, acquiring the company and then, in 2005, becoming part of Agilent, former semiconductor arm of HP, before taking it public three years later. Silver Lake sold the last of its holdings in 2012, but retained a seat on Avago's board. The transaction was one of the most lucrative in Silver Lake's history, generating five times the initial investment. Avago makes semiconductors used by Apple and Samsung Electronics for smartphones and sells over 6,500 products to OEMs in communications (wired and wireless), industrial, electronics, Half of its business is in various handset and base station RF chips and the rest in a mix of mainly optical components. Avago's Financial Results (in $million, FY ended in October)

	FY12	FY13	Y/Y growth
Revenue	2,364	2,520	7%
Net Income	700	731	4%

Note: The company's cash balance at the end of FY13 was $985 million, compared to $863 million at the end of the prior quarter. Avago's acquisition of LSI will create a business of around $4.9 billion in annual revenue and provide Avago with an excellent historical know-how in storage. The 32-year-old LSI focuses on making chips that control networks, especially storage for data centers, and also for mobile networks. For 3Q13 ended last September, sales reached $607 million, with server and storage semiconductor revenues, which include products from server rate adapter and software, flash (SandForce), SAS, SAN and HDD businesses, were $470 million. The company estimates that nearly 50% of revenues come from data center IT spending. LSI's Financial Results (in $million, FY ended in December)

	2012	2013*	Y/Y growth
Revenue	2,506	2,365	-6%
Net Income	203	120	-41%

* estimation Conclusion: Is there something else behind this enormous deal? Note that Silver Lake is a big part of it. This company is in technology investing with approximately $20 billion in combined assets under management and committed capital. Its specialization covers multi-billion dollar financial operations. Remember the huge one with Seagate becoming private and back to public which let to big profits. Maybe Silver Lake is using Avago to integrate LSI, reorganize it and then offer it to Wall Street to realize once more an excellent financial operation. But if Avago keep LSI, it will have better to keep its executives to have an understanding of the enterprise storage business. Document: All LSI's acquisitions (in $ million)

Year

Acquisition

Price

Activity of acquired firm

1998

Symbios

760

Disk array controllers; big deal lost by Adaptec

2000

DataPath Systems

420

Digital read channel chips