Silver Point is putting up $1 billion to help fund the deal, which is Avago's largest purhcase ever.
The payout for LSI comes to $11.15 per share. Shares of target rose $3.05, or 38.5%, to $10.96 on Monday following the news. Avago gained $4.34, or about 9.5% , to $49.99.
"First, the LSI position opens up an area where Avago has not been a major player, that is, until now, enterprise storage," said Avago CEO Hock Tan during a conference call pitching the deal to investors. The purchase will also boost Avago's offerings in wired infrastructure, one of the buyer's major product areas.The target has nearly $2.4 billion in sales. "It's a very attractive deal in the sense that Avago has a very nice operating model," said D.A. Davidson & Co. analyst Tom Diffely. LSI's margins are in the high teens to low 20% range, the analyst noted, whereas Avago's margins are around 30%. The buyer is domiciled in Singapore, and has a 5% tax rate. "If they can go in there and cut a couple hundred million on the SGA and R&D side of the business, the accretion is going to be very strong," Diffely said. Silver Lake and Kohlberg Kravis Roberts purchased Agilent Technologies Inc.'s semiconductor products group in 2005 for $2.6 billion, and renamed the business Avago. Silver Lake invested about $392 million in the LBO. The PE firms took Avago public in 2009. Silver Lake exited its investment in Avago in December 2012, but has maintained a board seat. Avago and Silver Lake developed the idea of the transaction with LSI independently, a person familiar with the matter said. The PE firm worked alongside Avago throughout the process. Silver Lake's funding will take the form of a seven-year 2% convertible note or prefered stock. The deal will help Avago diversify its customer base. Currently, Foxconn Electronics Inc. accounts for 17% of Avago's sales. Major customers include Apple Inc. and Cisco Systems Inc. The company has said that the concentration of its clientele put it at risk of quarterly fluctuations. Avago has made acquisitions recently, but on a smaller scale. In April, the company acquired wireless circuit maker Javelin Semiconductor Inc. for an undisclosed sum and paid $400 million for data and telecommunications optical chip company CyOptics Inc. "I'm surprised in the sense that its such a big acquisition," analyst Diffely said of the LSI purchase. "I thought there would be more of these sub-billion dollar bolt-ons over time." Avago plans to fund the deal with $1 billion in cash from the balance sheet of the combined companies, a $4.6 billion term loan and the $1 billion from Silver Lake. The company anticipates leverage of 3.8 times Ebitda, including the Silver Lake securities. The parties expect to close the deal in the first half of 2014.
--By Chris Nolter in New York