Avago to buy Broadcom

Avago Technologies Ltd. (NASDAQ:AVGO) says it has agreed to buy communications semiconductor company Broadcom Corp. (NASDAQ:BRCM) for $37 billion in cash and stock. The combined company would become the third largest provider of communications silicon by revenues, behind Intel and Qualcomm.

The combination would strengthen Avago's hand in silicon for infrastructure and networking as well as broadband access applications. In the optical networking world, Broadcom supplies ICs for PON applications through its acquisition of BroadLight (see "Broadcom to acquire PON chip vendor BroadLight"). The company also is an early player in silicon for G.fast (see "Broadcom debuts end-to-end G.fast offering"). As well, Broadcom has partnered with NTT Electronics (NEL) to develop DSPs for metro-focused coherent transmission applications (see "NTT Electronics, Broadcom pair for coherent DSP" and "NEL sampling second-generation 20-nm coherent DSP").

Avago, of course, offers a variety of optical interface and connectivity products, including transceivers and on-board optics, in addition to communications silicon (see, for example, "Avago demos 56-Gbps PAM4 SerDes" and "Avago, Corning show 100G embedded optical link with 550-m reach"). The company has made several acqusitions in the past, including some with optical networking implications (see, for example, "Avago to buy Emulex for $606 million plus debt" and "Avago strengthens 100G portfolio with CyOptics acquisition").

The companies expect to close the transaction by the end of the first quarter of calendar 2016. Hock Tan, president and CEO of Avago, will continue to serve in these roles for the combined company, which will operate as Broadcom Ltd. Dr. Henry Samueli, co-founder, CTO, and chairman of the board of Broadcom, will sit on the board of the combined company, as will another director from Broadcom. Dr. Samueli also will retain his CTO title. Dr. Henry T. Nicholas, co-founder and past CEO of Broadcom, will serve in a strategic advisory role, reporting to Tan.

"The combination of Avago and Broadcom creates a global diversified leader in wired and wireless communication semiconductors," Tan asserted. "Avago has established a strong track record of successfully integrating companies onto its platform. Together with Broadcom, we intend to bring the combined company to a level of profitability consistent with Avago's long-term target model."

Avago expects to achieve $750 million of annual cost synergies within 18 months of the acquisition's close. The company expects it new assets to be immediately accretive to non-GAAP EPS and free cash flow. Broadcom actually generates more revenues than Avago -- $8.5 billion to Avago's $6.6 billion.

The agreement calls for Avago to pay $17 billion in cash consideration and the economic equivalent of approximately 140 million Avago ordinary shares, valued at $20 billion as of May 27, 2015. That would give Broadcom shareholders ownership of approximately 32% of the combined company.

Broadcom shareholders will have the option of taking their "economic equivalent" in one of four ways $54.50 in cash, 0.4378 ordinary shares in a newly formed Singapore holding company ("HoldCo"), a restricted equity security that is the economic equivalent of 0.4378 ordinary shares of HoldCo that will not be transferable or saleable for a period of one to two years after closing, or a combination of these options. When the transaction closes, Avago shareholders will exchange their ordinary shares for HoldCo ordinary shares on a one-to-one basis.

Meanwhile, the $17 billion of cash will come from a combination of cash on hand from the combined companies and $9 billion in new, fully committed debt financing from a consortium of banks.

For more information on communications ICs and suppliers, visit the Lightwave Buyer's Guide.