Avago to Buy LSI for $6.6 Billion

Avago Technologies plans to make the biggest acquisition in its history â€" with the help of a former owner.

Avago, a semiconductor company, said on Monday that it had agreed to buy the LSI Corporation for about $6.6 billion in cash, moving into the world of networking and storage chips in a bet on the increased use of cloud and mobile software.

To finance the deal, Avago turned to Silver Lake, which acquired the company â€" then part of Agilent, the former semiconductor arm of Hewlett-Packard â€" with Kohlberg Kravis Roberts in 2005 and took it public three years later.

Silver Lake sold the last of its holdings last year, but retained a seat on Avago’s board. To date, the transaction was one of the most lucrative in Silver Lake’s history, generating a return of five times the initial investment.

Under the terms of the transaction, Avago will pay $11.15 a share, about 41 percent above LSI’s closing stock price on Friday.

As part of the deal, Silver Lake will invest $1 billion in the form of a convertible note, supplementing a $4.6 billion loan from a group of banks. Silver Lake’s seven-year note carries a coupon of 2 percent and converts to common stock at a price of $48.04, 5 percent above Friday’s closing price.

The transaction is intended to broaden Avago’s business, expanding into a lucrative sector with limited competition and healthy profit margins. The 32-year-old LSI focuses on making chips that control networks, especially storage for data centers. It reported $196.2 million in profit last year on revenue of $2.5 billion.

Buying LSI would help move Avago into a more mainstream industry, away from its specialized products for mobile device, network infrastructure and industrial companies. Its existing clients include Samsung, Cisco and its former parent, HP.

Avago also expects to benefit from economies of scale, projecting about $200 million in annual cost savings beginning in the first full year after closing, and double-digit improvements in operating margins.

“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,” Hock E. Tan, Avago’s chief executive, said in a statement. “This combination will increase the company’s scale and diversify our revenue and customer base.”

As part of a plan to expand through acquisitions, Avago first began considering a potential deal about six months ago, in consultation with Silver Lake, according to people briefed on the matter. Once it had settled on LSI, it began working on a way to pay for the deal without having to issue a significant amount of stock, taking advantage of low interest rates and a former owner willing to lend a hand.

“We are pleased to renew our highly successful partnership with Hock Tan and the Avago management team,” Kenneth Hao, a managing partner at Silver Lake, said in a statement. “We believe this is a strategically compelling transaction that creates a tremendous opportunity in the enterprise storage and networking markets, and will position Avago as one of the global leaders in the semiconductor industry.”

The deal is expected to close in the first half of 2014, pending approvals from regulators and LSI’s shareholders. The deal does not include a so-called go-shop provision that lets the target company solicit higher bids.