Singapore-incorporated Avago to buy Broadcom for $50b in biggest-ever chip deal

A man passes Broadcom's Asia operations headquarters office at an industrial park in Singapore. -- PHOTO: REUTERS
A man passes Broadcom's Asia operations headquarters office at an industrial park in Singapore. -- PHOTO: REUTERS

SINGAPORE (REUTERS) - Avago Technologies Ltd agreed on Thursday to buy Broadcom Corp for US$37 billion (S$50 billion) in the largest merger of chipmakers ever, turning a lesser known company run by a ferocious dealmaker into one of the biggest industry players.

Avago, which serves the wireless and industrial markets, is offering Broadcom shareholders US$17 billion in cash and Avago shares valued at US$20 billion.

Broadcom is best known for its connectivity chips, which are used widely in smartphones made by Apple Inc and Samsung Electronics Co Ltd.

The deal is the biggest so far by Avago Chief Executive Hock Tan, who has developed a small chipmaker into a US$36 billion company through acquisitions since taking the helm nine years ago.

The merger will help the companies improve their bargaining position with manufacturers. California-based Broadcom has been struggling to grow as competition in the mobile chip business intensifies. The company's revenue increased by just 1.5 per cent last year.

Broadcom's shares closed down 1.5 percent at US$56.25 on Thursday, while Avago's fell 0.62 percent to US$142.38.

The companies said they expected to close the deal by the end of the first quarter of 2016 and save US$750 million within 18 months. The deal has a breakup fee of US$1 billion, one of the unidentified sources said.

The new Broadcom would have annual revenue of US$15 billion and an enterprise value of US$77 billion, the companies said in a statement.

Broadcom shareholders will own about 32 per cent of the combined company. They would also have the option to choose between various combinations of cash and stock.

Avago, which is incorporated in Singapore and also has headquarters in San Jose, California, said it intended to fund the cash portion of the deal by using funds from the combined company and new debt of US$9 billion.

Mr Tan, a serial deal-maker, has trimmed Avago's portfolio by divesting units while bulking up in faster-growing areas.

The combined company, to be based in Singapore and known as Broadcom, will be the third-largest U.S. semiconductor maker by revenue, behind Intel Corp and Qualcomm Inc. The merger is the industry's second megadeal this year and is unlikely to be the last, analysts said.

The US$37 billion price represents a premium of about 28 per cent over Broadcom's market value of US$28.85 billion as of Tuesday's close, before the Wall Street Journal reported that the companies were in talks.

Demand for cheaper chips and new products to power Internet-connected gadgets is driving consolidation in the industry.

The Avago-Broadcom deal follows NXP Semiconductors' US$11.8 billion offer to buy Freescale Semiconductor Ltd in March. Avago had also bid for Freescale, people familiar with the matter said at the time.

Intel has also been in talks to buy chipmaker Altera Corp in a deal that could top US$10 billion.

Until Thursday, Avago's biggest deal was for chipmaker LSI Corp, which it bought for US$6.6 billion last year.