Chip-maker Broadcom has agreed to pay $3.7 billion for Santa Clara, Calif.-based NetLogic Microsystems, which makes smart chips used to send voice, video and other data to people via cyberspace, the companies announced Monday.
Broadcom CEO Scott McGregor said NetLogic's chips, which can do everything from spotting computer viruses to helping move data more efficiently, handle different networking functions than Broadcom's chips, and that makes the companies a nice fit.
"They are very complementary products and by bringing them under one roof we can bring more value to the customers," he said.
Based in Irvine, Broadcom sells chips for home-based consumer products, such as DVD players, digital television sets and cellphones, as well as some relatively low-level chips used in networking equipment, said Linley Gwennap, an analyst with the Linley Group. However, Broadcom should be able to expand in the networking market with its purchase of NetLogic, whose brainier chips are key components of routers, switches, datacenter servers and network storage equipment.
"With more people buying smartphones and iPads, all that data has to go somewhere," which is why the networking market is increasingly attractive, he said.
Gwennap also noted that the two companies sell to the same companies, including Cisco Systems of San Jose, which should ease the complexity of integrating NetLogic with Broadcom. Other Broadcom customers include Apple, Hewlett-Packard, Dell, Motorola, Nokia, Samsung and Nintendo.
The deal, which has been approved by the boards of both companies, is expected to be finalized in the first half of next year, assuming approval from NetLogic shareholders, who would receive $50 a share, the companies said. That would represent a 57 percent premium above NetLogic's closing price Friday of $31.91.
After Monday's announcement, NetLogic's shares rose $16.21, nearly 51 percent, to close at $48.12. Broadcom's stock price fell 38 cents, or about 1 percent, to close at $33.06.
Shares of San Jose-based Cavium Networks, a key NetLogic competitor, also rose with the news. Its shares increased $2.19, or 7 percent, to close at $33.10. Some analysts speculated that the Broadband-NetLogic deal could prompt another chipmaker to buy Cavium.
Broadcom, which was founded in 1991 and went public in 1998, produces more than a billion chips a year, according to the company, and has acquired nearly 50 companies since 1999. It earned slightly more than $1 billion on sales of $6.8 billion last year.
By comparison, NetLogic -- which was incorporated in 2000 and went public in 2004 -- had sales last year of $382 million. While that represented a 119 percent increase from 2009, the company lost $66.4 million for the year.
A marriage with Broadcom would represent "a strong win for customers, for shareholders and for NetLogic Microsystems employees," NetLogic President and CEO Ron Jankov said in a statement.
McGregor, Broadcom's CEO, said there were no plans to lay off any employees as a result of the proposed acquisition. To the contrary, he said, "we might end up hiring."
Broadcom had 8,950 employees and NetLogic had 645, according to their last annual reports.
"We think the deal makes a ton of sense for Broadcom," concluded analysts at BMO Capital Markets in a note to their clients. Given the increasing appetite for mobile devices, they said, "we like a few companies who enable the plumbing that allows us to keep on using more bits of data on the go."
But they questioned the high premium Broadcom has agreed to pay, adding, "we are not crazy about the valuation."
In a separate note, analysts at FBR Capital Markets said "investors think the deal was richly priced but necessary for Broadcom to get these highly prized assets." FBR called the deal "a strategic positive for Broadcom" and said it would allow the Irvine chipmaker to acquire "a talented engineering work force."
If approved, the purchase would be one of several multibillion deals this year involving Silicon Valley semiconductor companies.
In May, Santa Clara-based chip equipment maker Applied Materials announced it was buying Varian Semiconductor Equipment Associates of Gloucester, Mass., for $4.9 billion. In April, Texas Instruments of Dallas unveiled a $6.5 billion deal to buy National Semiconductor of Santa Clara. In January, Qualcomm of San Diego announced a $3.1 billion deal to buy San Jose-based Atheros Communications.
Contact Steve Johnson at firstname.lastname@example.org or 408-920-5043.
Headquarters: Santa Clara
Products: Microchips for routers, switches, servers and network storage equipment
2010 revenue: $381.7 million
2010 net income: Lost $66.3 million
Employees: 645 as of Dec. 31, the most recent annual report.
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