Chipmaker Broadcom Corp (Irvine, Calif., U.S.A.) plans to buy NetLogic Microsystems Inc (Santa Clara, Calif., U.S.A.) for about $3.7 billion to expand its lineup of chips used in wireless network equipment to take advantage of growing demand for mobile data services.
The $50-per-share deal, which represents a premium of 57% over NetLogic's Friday close of $31.91 on the Nasdaq, sent NetLogic's shares soaring 50% on Monday. But Broadcom shares were down 2.5% at $32.60 as some investors questioned the steep premium.
Broadcom Chief Executive Scott McGregor defended the premium, noting that NetLogic would bring faster profit and revenue growth and that the addition of the products to Broadcom's lineup would double the size of the network equipment market it can go after to about $12 billion by 2015.
"Premier assets are going to cost more than a fixer-upper," says McGregor. "They're a decent growth company. They accelerate our revenue growth and increase our market opportunity."
Broadcom already sells different types of chips to the same network equipment makers that use NetLogic products. Broadcom chips help direct traffic across networks while the NetLogic chips are used to examine the type of data on the network so that it can be processed more efficiently.
"It doesn't bring us any new customers but it brings us new value for the customers we have," McGregor said.
He said that Broadcom would continue to look for more acquisitions in the communications chip market. It would cost a lot for Broadcom to build the NetLogic technology itself, Williams Financial analyst Cody Acree said.
"It's a high premium but it's a necessary premium. NetLogic has a huge amount potential," says Acree. "They've developed a portfolio of products that's unique and difficult for Broadcom to reproduce."
Shares of NetLogic rival Cavium Inc were up 5% at $32.47 on Monday as some investors hoped Cavium could also attract a suitor. However, Acree said that a stronger NetLogic could make it more difficult for Cavium to compete.
The companies said the transaction has been approved by their respective boards and was expected to close in the first half of 2012.
Broadcom expects the deal to add 10 cents a share to earnings on an adjusted basis in 2012. It kept its forecast for third-quarter revenue of $1.9 billion to $2 billion, with product gross margins flat to slightly higher.
Broadcom said it expects to have around $4.2 billion in cash on hand by the end of third quarter, up from some $3.8 billion at the end of the second quarter.
In its latest quarterly report, NetLogic posted a 14.4% revenue increase to $98.7 million. Roughly 42% of revenue depends on network equipment sales in China.
NetLogic already sells chips to Cisco Systems Inc and Alcatel-Lucent and said in May that it expects Hewlett-Packard Co, Ericsson and ZTE to become major customers later this year as they increase spending on high-speed wireless technologies.
(Reporting by Sinead Carew, with Yinka Adegoke in New York and Supantha Mukherjee in Bangalore; editing by Derek Caney, Maureen Bavdek and Matthew Lewis)