Irvine-based Broadcom Corp.’s field-clearing $3.7 billion cash offer to buy fellow chipmaker NetLogic Microsystems Inc. raised eyebrows on Wall Street.
Broadcom Chief Executive Scott McGregor says the price for the Santa Clara-based company is right.
NetLogic shareholders will receive $50 per share, a premium of about 57% on the closing price on Sept. 9, the last trading day before the agreement was announced.
The offer comes to nearly nine times NetLogic’s revenue, the biggest such multiple paid in any deal of $500 million or more in the chip industry since 2004, according to data from Bloomberg.
“It’s a premier asset,” McGregor said. “It’s hard to find companies that are rapidly growing, reasonably sized with good margins and good profitability. Those are relatively rare.”
The deal came after Broadcom executives debated the best route to gaining processor technology and other network infrastructure for months.
The company basically had three options, according to McGregor: build within, work with startups or acquire an established player.
“We’ve been talking with participants in all those areas for a number of months,” McGregor said.
Cost, time to market and reducing risk were key factors Broadcom weighed.
NetLogic quelled all those concerns, ac-cording to McGregor.
“Whenever you buy a more mature company you have less market risk, you know a bit more of what you’re getting and you know the customers are going to like it,” he said. “It also reduces the time to market because if we were to develop it organically or work with a startup company, it would be a number of years before we saw a significant market presence.”
Boards Approve
The deal has been approved by both companies’ boards and is expected to close in the first half of next year. It’s Broadcom’s most expensive to date and one of the biggest in the chip sector in the last five years. It would complement Broadcom’s vast portfolio of chips for mobile phones, tablets and other wireless devices.
Broadcom has coveted the sort of infrastructure technology—network, embedded and knowledge-based processors—that’s at the core of NetLogic. The company’s chips are considered among the fastest in the market and part of a new generation thought to be essential for making the next version of smarter chips.
Broadcom chips help direct traffic across networks while NetLogic chips examine the type of data on the network, boosting processing speed and efficiency.
The next version of smarter chips are needed to handle increasing traffic in data centers, big telecom switching centers and wiring closets—the central distribution point for cables in a network.
“It definitely increases our market opportunity,” McGregor said.
Without NetLogic, Broadcom can go after a portion of the infrastructure market worth about $3 billion in annual sales, according to McGregor.
Broadcom Corp.
• Headquarters: Irvine
• Business: chipmaker
• Founded: 1991
• Ticker symbol: BRCM (Nasdaq)
• Market value: about $19.1 billion
NetLogic Microsystems Inc.
• Headquarters: Santa Clara
• Business: chipmaker
• Founded: 1995
• Ticker symbol: NETL (Nasdaq)
• Market value: about $3.3 billion
• Notable: Broadcom’s $3.7 billion offer approved by both companies’ boards, expected to close in first half of next year.
Potential Doubled
The NetLogic buy would instantly double Broadcom’s potential in that segment, which is expected to grow to $12 billion by 2015.
Analysts largely welcomed the deal, although some expressed concerns on the premium.
Deutsche Bank Securities Inc. called the move “strategically logical” as it expands Broadcom’s market and adds another growth driver “albeit at a hefty price paid.”
FBR Capital Markets & Co.’s Craig Berger said NetLogic’s technology allows Broadcom to integrate and sell more complete platform solutions while adding a sizeable and talented engineering work force.
Clear Field
He doesn’t see another bidder entering the fray, given the bar set by Broadcom’s bid.
“We do not believe another buyer will emerge given the strategic fit and vast price premium,” he said in an investor note last week. “Investors will likely focus on the rich valuations paid by Broadcom for NetLogic and whether this is the firm’s best use of nearly all its cash.”
Broadcom projects cash reserves will be nearly $5 billion before the deal for NetLogic closes in the first half of next year, according to Chief Financial Officer Eric Brandt.
NetLogic is the biggest acquisition ever by Broadcom, which has taken some knocks from analysts for its tradition of making relatively small deals for companies with anywhere from 50 to 200 employees. NetLogic has 700 employees and sizeable operations around the world, which could present some challenges.
Concerns Downplayed
McGregor downplayed any concerns about integrating the acquisition.
“In this case the culture was very much the same,” he said.
The companies also have a number of key customers in common.
Broadcom’s chips often sit next to NetLogic’s on the backplane of network switching equipment.
Three of every four employees at NetLogic are engineers, a similar percentage as Broadcom, McGregor said.
NetLogic’s headquarters is in Silicon Valley, where Broadcom has four offices and its second-largest base of operations after Irvine. Broadcom employs about 2,300 people in San Jose, Santa Clara and Sunnyvale, according to a company spokes-person.
Broadcom’s infrastructure networking group, headed by Rajiv Ramaswami, is part of the company’s Silicon Valley contingent.
NetLogic Chief Executive Ron Jankov will continue to lead his team there and report to Ramaswami, McGregor said in a conference call last week.
