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 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