By Supantha Mukherjee and Abhirup Roy
(Reuters) - Avago Technologies Ltd
creating a company that will be able to supply chips used in everything from iPhones to servers used in data centers.
Avago, a maker of chips for the wireless and industrial markets, is offering Broadcom shareholders $17 billion in cash and Avago shares valued at $20 billion. [ID:nGNXVDRNHa]
The deal represents a premium of about 28 percent, according to Reuters calculations based on Broadcom's market value of $28.85 billion as of Tuesday's close, the day before the Wall Street Journal reported that the companies were in talks.
Demand for cheaper chips and new products to power Internet-connected gadgets is driving consolidation in the industry.
The deal, which will create the third-largest U.S. semiconductor maker by revenue behind Intel Corp
"I think it makes sense for companies to be aggressive now because there are a limited number of properties out there and I think the guys that are being more aggressive now have the best opportunities to get the best of what's available," Raymond James analyst Steven Smigie told Reuters.
Pacific Crest Securities analysts said Qualcomm could also bid for Broadcom, noting that the company recently filed a shelf registration of an indeterminate amount.
MORE DEALS?
Other chipmakers such as Xilinx Inc
The Avago-Broadcom deal follows NXP Semiconductors NV's
Intel is in talks to buy fellow chipmaker Altera Corp
Until Thursday, Avago's biggest deal was for chipmaker LSI Corp, which it bought for $6.6 billion last year.
Avago and Broadcom first spoke about a potential merger in October 2014 but could not agree on price, according to people familiar with the matter.
Talks heated up in April when Avago approached Broadcom again with a few higher offers and negotiations continued until the two agreed on a deal, the people said.
BARGAINING CHIP
The deal will also help the companies improve their bargaining position with manufacturers.
Irvine, California-based Broadcom makes semiconductors for a variety of products, including set-top boxes, cellphones and network equipment.
The company is best known for its connectivity chips, which are used widely in smartphones made by Apple Inc
But the company has been struggling to grow amid intense competition in the mobile chip business. The company's revenue increased just 1.5 percent last year.
Broadcom shares were down 3 percent at $55.46 on Thursday, while Avago was down 1 percent at $140.01.
Broadcom's shares rose as much as 23 percent on Wednesday following the Wall Street Journal report, while Avago rose as much as 10 percent.
The companies said they expected to close the deal by the end of first quarter of 2016 and save $750 million in costs within 18 months.
The combined company, to be based in Singapore, would have annual revenue of $15 billion and an enterprise value of $77 billion, the companies said in a statement.
Broadcom shareholders will own about 32 percent of the combined company. They would also have the option to choose between various combinations of cash and stock.
Avago, which is incorporated in Singapore and has dual headquarters there and in San Jose, California, said it intended to fund the cash portion of the deal by using funds from the combined companies and a new debt of $9 billion.
Avago was advised by Deutsche Bank
Broadcom was advised by JPMorgan Chase
Skadden, Arps, Slate, Meagher & Flom LLP is the legal adviser to Broadcom.
Broadcom co-founder Henry Nicholas was advised by Centerview and Morrison & Foerster.
(Additional reporting by Liana B Baker in New York; Editing by Sriraj Kalluvila)
