San-Jose, California-based Cavium will pay $15.50 per share for QLogic, including $11 in cash and 0.098 of a Cavium share. The deal values the target at an enterprise value of about $1 billion, including QLogic's $355 million of cash.
"QLogic's industry leading products extend our market position in data center, cloud and storage markets, and further diversifies our revenue and customer base," said Cavium President and CEO Syed Ali in a statemement. "In addition to the compelling strategic benefits, the manufacturing, sales and operating synergies will create significant value for our shareholders."
Cavium shares traded in the pre-market at $41.29, down $6.71 or 14% on their Wednesday close. QLogic shares headed in the opposite direction, rising to $15.02, up $1.48 or 11%.
"We struggle to see the strategic rationale and see it as growth/margin dilutive for at least the medium term," noted Oppenheimer Equity Research analyst Rick Schafer. "We're further puzzled by the timing of the deal with (Cavium) shares 25% off April highs."
Wedbush analyst Betsy Van Hees cut Cavium's price target to $51 from $68, noting that "the growth profile of CAVM (Cavium) has changed and in our view no longer supports the premium multiple valuation that CAVM has enjoyed."
The deal is the latest in a series of acquisition by chipmakers that have been pushed into deals by stagnant revenue growth due to fierce competition. In 2015, Intel (INTC) - Get Report paid $16.7 billion for Altera, Avago Technologies (AVGO) - Get Report snapped up Broadcom for $37 billion and NXP Semiconductors (NXPI) - Get Report acquired Freescale Semiconductor for $16.7 billion.
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Cavium's decision to look beyond the chip market for deals appears a reflection of both the increasingly limited acquisition opportunities within the semiconductor sector and its own size. With a market capitalization of $2.78 billion it is a relative minnow in the sector.
Cavium in April reported first quarter sales of $101 million, a figure that was largely unchanged from a year earlier, and posted a net loss of $3.8 million. QLogic posted net revenues of $119 million and net income of $18 million in the final quarter of its 2016 fiscal year ending April 3.
The acquisition, which has been backed by both companies' boards, will boost Cavium's earnings per share by $0.60 to $0.70, including $45 million of cost savings that are expected to be realized by the end of 2017, according to the buyer.
Cavium will fund the cash element of the deal using $220 million of balance sheet cash and $750 million of debt financing. The transaction is expected to close in the third quarter.
J.P. Morgan provided financial advice to Cavium. A Skadden, Arps, Slate, Meagher & Flom LLP team including partners Kenton King, Michael Mies, Kristine Dunn provided legal counsel to Cavium. Qatalyst Partners was QLogic's financial advisor, while O'Melveny & Myers LLP were the target's legal counsel.