Avago Technologies to Acquire LSI Corp at 41% Premium

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On Monday morning, it was announced that Avago Technologies (AVGO), a leader in advanced optical, analog and mixed-signal chip design, will acquire LSI Corp (LSI), a strong market participant in hard disk drive semiconductor, system-level silicon for communications and server applications and flash storage solutions. AVGO will pay $6.6 billion for LSI, or $11.15 per LSI share.

This is a 41% premium from Friday’s close and represents a fwd-PE (non-GAAP) of ~17.0x for LSI shares Net of LSI’s cash, AVGO is paying $5.9 billion. Adding in LSI’s pension obligation and netting out cash, AVGO is paying $6.4 billion. Our previous price target for LSI was $7.00; however, we are raising our price target to $11.15 to adjust for the takeout premium. As typically the case, we believe LSI went through the process of seeking competitive bid to that of AVGO’s, and accordingly, we do not expect a higher offer for LSI.

The acquisition is instantly accretive for AVGO on a non-GAAP basis (plus $200 million in eventual cost synergies to be realized). We expect the combined companies will have the following characteristics: 1) 6%-8% top-line growth (organic), 2) gross margin of ~52% and 3) non-GAAP operating margin target of 29%-32%.

The acquisition gives AVGO system-level expertise, which means AVGO will be able to leverage advanced analog design capabilities into a system-on-chip designs which consist of more logic and digital circuits. In essence, AVGO wants LSI’s multicore processor capabilities for wired and wireless infrastructure which will complement AVGO’s fiber and SerDes products.

An additional consideration is that this combination of AVGO and LSI may create a disruption in each company’s respective product areas. At this point in time, AVGO management does not know for sure whether certain LSI products may be pruned. Additionally, AVGO management is not planning to fail in any targeted market. However, should management lose focus on any addressed market, we believe companies such as FIO, PMCS and MRVL could benefit.

 

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