Christmas has come early for LSI investors. Avago Technologies is buying LSI for $6.6bn – and they're paying cash.
Avago; who they? A former HP spin-out, Avago is jointly headquartered in Singapore and San Jose. Avago Technologies was once the semiconductor products part of HP, which was separated out as Agilent Technologies and then spun off in 1999.
KKR and Silver Lake Partners bought Agilent's Semiconductor Products Group for $2.6bn in 2005 and used it to set up Avago Technologies. Four years later Avago IPO'd in August 2009.
Avago says it sells over 6,500 products to OEMs in communications (wired and wireless), industrial, electronics, consumer and computing markets. Its fiscal 2013 revenue was $2.52bn with profits of $552m. And now it's buying LSI to become a force in enterprise storage - sort of.
LSI sells communications-related semi-conductor gear as well as having a NAND flash business.
The $6.6bn cash price, $11.15/LSI share, is more than 2.6X Avago's fiscal 2013 revenue. Where is this cash coming from?
- Avago will provide $1bn of cash from the combined balance sheet.
- There will be a $4.6bn term loan from a group of banks.
- Silver Lake Partners will punt in $1bn, expected to be in the form of a seven year 2 per cent convertible note.
Avago highlights the advantages of buying LSI with $5.6bn debt financing like this:
- Positions Avago as a leader in enterprise storage
- Expands Avago's market position and brings valuable system-level expertise in wired infrastructure
- It diversifies revenue and scales up Avago across multiple attractive end markets
Avago says the deal works because it adds "enterprise storage to Avago's existing wired infrastructure, wireless and industrial businesses. The combined company will be strongly positioned to capitalise on the growing opportunities created by the rapid increases in data centre IP and mobile data traffic."
Here's Hock Tan, Avago president and CEO, quoted on the deal: "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."
LSI revenues were $2.5bn in its fiscal 2012 year, with profits of $202.7m, not that far from Avago's results; it certainly isn't a weak partner or faltering business. What's its motivation for the deal?
Abhi Talwalkar, LSI's president and CEO, said: "Our leadership positions in enterprise storage and networking, in combination with Avago, create greater scale to further drive innovations into the datacenter."
It's about scale and synergies, though El Reg's storage desk wonders about LSI not having a more compelling vision for its storage business.
The "leader in enterprise storage" bit is about selling storage components to OEMs:
- Server storage:
- Syncro Shared DAS Storage
- RAID Controller Cards
- Host Bus Adapters (HBAs)
- RAID-on-Chip ICs (ROCs)
- Storage I/O Controller (IOCs)
- SAS Expanders
- SAS Switch
- Disk drive gear:
- Hard Disk Drive SoCs
- Flash tech:
- Nytro PCIe flash cards
- SandForce SSD controllers
LSI's stake in the PCIe flash card market is hotly contested with LSI having a significant weakness; it has no strategic tie up with a NAND foundry for chip supply. Also, selling flash storage products for servers to enterprise system OEMs is a long, long way from selling semiconductor components in quantities of hundreds of thousands or more to suppliers further down the finished product value chain.
LSI's SandForce SSD controller business involves SSD suppliers buying the controllers as component technology for their SSDs. There are other controllers out there and the big SSD suppliers are getting, or already own, their own controller technology. This business doesn't have the potential it once had.
LSI has a good disk drive controller components business, selling to Seagate and, no doubt, WD and possibly Toshiba. These are the only three customers for these devices and the business is basically dependent on demand for disk drives - which looks solid.
Avago has no equivalent business so there is no scale to be gained here, in PCIe NAND flash and SSD controllers. We can't see how Avago's channel could add much either, but then we're dim hacks and not corporate strategists.
The server business seems to be contracting, under the influence of the cloud so that market's prospects appear to be closing down somewhat rather than opening up.
Avago reckons there could be $200m/year worth of synergies realised by bringing the two companies together. The combined company will have annual revenues of $5bn.
You don't borrow $5.6bn, invest half a billion from Avago and another half billion from LSI to buy out LSI just to realise a pissant $200m/year. Someone in Avago – and in Silver Lake – is seeing big revenue bucks down the road here, like a prospect of $10bn annual revenues in a few years time. But what the hell from?
We can't see it coming from disk drives. We can't see it coming from SSD controllers; some sales, yes, but not really big bucks. We can't see it coming from shipping gear for servers; not with a server downturn threatening.
And, we're sorry, but we can't see it coming from PCIe flash cards either. There's something else going on here; we're convinced of it but we're damned if we can work out what. Maybe LSI has wondrous tech in its labs. But why not develop that itself instead of selling up to Avago? Is LSI management simply taking the Avago cash and running?
An SEC filing is coming. Hopefully there will be more information in that. ®