Avago offers $6.6 billion for San Jose chipmaker LSI

Singapore-based Avago Technologies on Monday agreed to pay $6.6 billion for San Jose chipmaker LSI, the second major semiconductor deal in three months.

“We are very excited by this strategic opportunity,” Avago CEO Hock Tan said during a conference call with analysts. “By joining forces with LSI, we are strengthening our capabilities.”

The companies said Monday that their boards have agreed to the transaction and that it’s expected to be concluded in the first half of next year, although it still must be approved by LSI’s investors and regulatory authorities. The all-cash purchase, which would amount to $11.15 per LSI share, represents a 41 percent premium over LSI’s share price Friday.

Analysts disagreed on whether Avago’s proposed purchase of LSI — coming on the heels of the September announcement of the deal for Applied Materials to pay $9.39 billion for Tokyo Electron — signaled that more chip-company transactions could be in the works.

Richard Fichera of the research company Forrester sees little evidence of a trend developing, although he said there could be some mergers involving so-called foundries — companies that make chips for other firms.

But others suspect otherwise.

“I think we will be seeing a lot more chip mergers and acquisitions in the future,” said tech analyst Patrick Moorhead. “There is a glut of chipmakers in the networking and processor spaces and I see some consolidation coming.”

Sergis Mushell of research firm Gartner — who said he believes LSI has been looking for a buyer for the past couple of years — agreed.

“Any time you have a maturing market, you always have consolidation,” he said. “The semiconductor market is maturing, so without a doubt consolidation will come.”

Avago, which makes analog chips for wireless, industrial and other applications, wants LSI’s business data-storage chips. Both companies have long Silicon Valley heritages. Avago, which was founded in 1961, at one time had been part of Palo Alto giant Hewlett-Packard (HPQ) and maintains what it calls “co-headquarters” in San Jose.

LSI, founded in 1981, had stumbled financially before CEO Abhi Talwalkar took the helm in 2005, but has generally performed well since he shifted its focus from consumer-oriented products to chips aimed at businesses.

In a note to his clients, Raymond James analyst Hans Mosesmann said he believes LSI’s investors “should be pleased” with the proposed purchase price and added that “we don’t see another buyer stepping into the fray” for LSI.

However, FBR Capital Markets analyst Christopher Rolland speculated that some other companies might be interested in making a competing offer.

“While we think the probability of another bid is low, we do believe LSI may be more strategically valuable for others besides Avago” because they already use LSI’s technology or might want to do so, he concluded in a note to his clients. Rolland said those companies include Broadcom, Intel (INTC), SanDisk, Seagate, Toshiba and Western Digital.

Contact Steve Johnson at 408-920-5043. Follow him at Twitter.com/steveatmercnews.