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Broadcom breaks piggy bank for $3.7bn NetLogic buy

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It's crunch time in the networking and communications chip biz, with Broadcom whipping out $3.7bn to acquire chip maker NetLogic Microsystems to fill a hole in its line.

The deal comes on the heels of Intel's acquisition of Ethernet ASIC maker Fulcrum Microsystems back in July, and presages what will likely be more acquisitions in the coming months as companies try to expand their revenues by using their cash wads to buy up competitors or chip makers in adjacent markets.

This is precisely why giving US corporations a tax holiday does not create jobs. In fact, you could make a fair argument that it will destroy a bunch. At the same time, consolidation can lead to efficiencies and synergies as well as increased profits, and that is good for the 401(k) retirement fund.

Broadcom was founded in 1991 and went public in 1998, pretty much at the peak of the dot-com bubble. It has grown to be one of the largest fabless semiconductor manufacturers, with a focus on chips used in broadband cable and DSL modems, and set top boxes; mobile handset and wireless LAN equipment; and other wireless devices. The company also sells chips that end up in switches, servers, storage, and other enterprise networking gear.

Broadcom has grown organically as well as through acquisitions – this NetLogic buy marks the 51st deal Broadcom has done to embiggen itself since going public.

Broadcom has 9,460 employees and had $6.82bn in sales in 2010, up 51.8 per cent, and brought $1.08bn of that to the bottom line. Not too shabby for a hardware vendor. (Of course, in 2009, its profits had flatlined, so a bad economy is not a good thing for Broadcom.) In the second quarter ended in June, Broadcom had $1.8bn in cash and just over $2bn in investments, so it is pretty much emptying its piggy bank to buy NetLogic.

That $3.7bn price tag for NetLogic represents a 57 per cent premium over the company's closing price last Friday, and is a large pile of money for a company that brought in $381.7m in revenues and booked a loss of $66.4m in 2010.

One of the things that no doubt excites Broadcom is the XLP II communications processor that NetLogic announced just last week. The XLP II chips have 80 nxCPU cores and are implemented in a 28 nanometer process from Taiwan Semiconductor Manufacturing Corp.

Perhaps more importantly, the XLP II communications processors have on-chip symmetric multiprocessing (SMP) to allow cache coherency across up to eight of the XLP II chips for a total of 640 cores in a single image. The nxCPU cores implement a superscalar pipeline with out-of-order execution, run at up to 2.5GHz, and have 32MB of cache. When you gang eight of these puppies up, you can build a network device that can cope with 800Gb/sec of bandwidth, according to NetLogic.

The XLP II chip is based on a variant of the MIPS instruction set, just like rival Cavium Networks' Octeon line of network processors. Either one of these chips would make an interesting server processor. In fact, Taiwanese communication equipment maker Caswell has built micro servers using Octeon chips.

By the way, NetLogic didn't make the XLP II chips itself, but got them through a $183.4m acquisition of a fabless chip maker called RMI back in June 2009. This is not all that NetLogic has going for it, of course, but it is the interesting bit.

The XLP II chips will start sampling early next year, and were set to shake up the communications processing racket that is controlled by Freescale Semiconductor, Intel, and Cavium at the moment.

NetLogic is a publicly traded company, so Broadcom has some regulatory hurdles to get through to seal the NetLogic deal, and there is still an outside chance that someone may bid higher for the company – but that's not bloody likely at the premium that Broadcom is paying.

Broadcom said in a statement that it expected the acquisition would be completed in the first half of next year, and that it would be accretive to Broadcom's earnings on a non-GAAP basis in 2012. Broadcom also reiterated its guidance for the third quarter of this year, telling Wall Street that it would be in the middle of a tight $1.9bn and $2bn revenue range with gross margins flat to up a bit.

The company is also forecasting that it will have $4.2bn in cash and equivalents in the bank by the end of September, so it won't be flat broke after it does the NetLogic deal. ®

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