Feeds

Avago Technologies chomps up LSI for BEELLLIONS - in CASH

Six point six billion dollars, to be precise. But what's the plan?

Security and trust: The backbone of doing business over the internet

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
    • Pre-amplifiers
  • 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. ®

New hybrid storage solutions

More from The Register

next story
Phones 4u slips into administration after EE cuts ties with Brit mobe retailer
More than 5,500 jobs could be axed if rescue mission fails
JINGS! Microsoft Bing called Scots indyref RIGHT!
Redmond sporran metrics get one in the ten ring
Driving with an Apple Watch could land you with a £100 FINE
Bad news for tech-addicted fanbois behind the wheel
Murdoch to Europe: Inflict MORE PAIN on Google, please
'Platform for piracy' must be punished, or it'll kill us in FIVE YEARS
Phones 4u website DIES as wounded mobe retailer struggles to stay above water
Founder blames 'ruthless network partners' for implosion
Found inside ISIS terror chap's laptop: CELINE DION tunes
REPORT: Stash of terrorist material found in Syria Dell box
Sony says year's losses will be FOUR TIMES DEEPER than thought
Losses of more than $2 BILLION loom over troubled Japanese corp
prev story

Whitepapers

Providing a secure and efficient Helpdesk
A single remote control platform for user support is be key to providing an efficient helpdesk. Retain full control over the way in which screen and keystroke data is transmitted.
WIN a very cool portable ZX Spectrum
Win a one-off portable Spectrum built by legendary hardware hacker Ben Heck
Storage capacity and performance optimization at Mizuno USA
Mizuno USA turn to Tegile storage technology to solve both their SAN and backup issues.
High Performance for All
While HPC is not new, it has traditionally been seen as a specialist area – is it now geared up to meet more mainstream requirements?
Security and trust: The backbone of doing business over the internet
Explores the current state of website security and the contributions Symantec is making to help organizations protect critical data and build trust with customers.