What Has Avago (AVGO) and LSI Corp (LSI) Soaring to New Heights?

NEW YORK (TheStreet) -- A billion-dollar deal among two semiconductor companies is moving markets on Monday morning. Avago Technologies (AVGO) and LSI Corp (LSI) have surged on the news the former will purchase the latter for $11.15 a share, or $6.6 billion, in an all-cash deal.

By mid-morning, Singapore-based Avago had added 8.5% to $49.51, while San Jose, Calif.-based LSI exploded 38.8% to $10.98.

Avago said it will use a $4.6 billion term loan and a $1 billion investment from Silver Lake Partners to fund the acquisition. The deal to purchase LSI's outstanding shares puts its stock at an approximate 41% premium to Friday's close of $7.91 a share.

The acquisition will create a company with around $5 billion in annual revenue and diversify Avago's wireless communications and wired infrastructure operations to include LSI's specialty in developing storage and networking semiconductors. This will allow for the company to reap the rewards of data center growth and increased mobile traffic.

In addition, the merged company will likely realize $200 million in annual operating costs overlap by the end of fiscal 2015.

"This highly complementary and compelling acquisition positions Avago as a leader in the enterprise storage market and expands our offerings and capabilities in wired infrastructure, particularly system-level expertise," said Avago CEO Hock Tan in a statement. "As we integrate LSI onto the Avago platform, we expect to drive LSI's operating margins toward Avago's current levels, creating significant additional value for stockholders."

The purchase has been approved by both companies' boards and will close pending regulatory approval and support from LSI stockholders.

TheStreet Ratings team rates Avago Technologies LTD as a Buy with a ratings score of A+. The team has this to say about their recommendation:

"We rate Avago Technologies LTD (AVGO) a BUY. This is based on the convergence of positive investment measures, which should help this stock outperform the majority of stocks that we rate. The company's strengths can be seen in multiple areas, such as its revenue growth, largely solid financial position with reasonable debt levels by most measures, solid stock price performance, increase in net income and expanding profit margins. We feel these strengths outweigh the fact that the company shows weak operating cash flow."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • The revenue growth came in higher than the industry average of 10%. Since the same quarter one year prior, revenues rose by 19.4%. This growth in revenue appears to have trickled down to the company's bottom line, improving the earnings per share.
  • AVGO's debt-to-equity ratio is very low at 0.00 and is currently below that of the industry average, implying that there has been very successful management of debt levels. Along with this, the company maintains a quick ratio of 3.32, which clearly demonstrates the ability to cover short-term cash needs.
  • Investors have apparently begun to recognize positive factors similar to those we have mentioned in this report, including earnings growth. This has helped drive up the company's shares by a sharp 32.34% over the past year, a rise that has exceeded that of the S&P 500 Index. Regarding the stock's future course, although almost any stock can fall in a broad market decline, AVGO should continue to move higher despite the fact that it has already enjoyed a very nice gain in the past year.
  • The gross profit margin for Avago Technologies LTD is rather high; currently it is at 54.47%. It has increased from the same quarter the previous year. Along with this, the net profit margin of 23.3% is above that of the industry average.
  • The net income growth from the same quarter one year ago has significantly exceeded that of the Semiconductors & Semiconductor Equipment industry average, but is less than that of the S&P 500. The net income increased by 8.2% when compared to the same quarter one year prior, going from $159.00 million to $172.00 million.

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