As most of you will know by now, Broadcom announced the acquisition of NetLogic Microsystems earlier this morning. The deal, expected to close in the first half of 2012, involves Broadcom paying out $3.7 billion in cash, or about $50 per NetLogic (NETL) share. For NetLogic shareholders, that’s a 57-percent premium on the company’s closing share price on Friday, September 9.
Sharp Premium
The sharp premium suggests a couple possibilities. One is that Broadcom had competition for NetLogic. Given that Frank Quattrone’s investment bank, Qatalyst Partners, served as an adviser to NetLogic, it’s certainly possible that a lively market existed for the seller. Another possibility is that Broadcom wanted to make a preemptive strike, issuing a bid that it knew would pass muster with NetLogic’s board and shareholders, while also precluding the emergence of a competitive bid.
Either way, both companies’ boards have approved the deal, which now awaits regulatory clearance and an approbatory nod from NetLogics’ shareholders.
In a press release announcing the acquisition, Broadcom provided an official rationale for the move:
Deal Rationale
“The acquisition meaningfully extends Broadcom’s infrastructure portfolio with a number of critical new product lines and technologies, including knowledge-based processors, multi-core embedded processors, and digital front-end processors, each of which offers industry-leading performance and capabilities. The combination enables Broadcom to deliver best-in-class, seamlessly-integrated network infrastructure platforms to its customers, reducing both their time-to-market and their development costs.”
Said Scott McGregor, Broadcom’s president and CEO:
“This transaction delivers on all fronts for Broadcom’s shareholders — strategic fit, leading-edge technology and significant financial upside. With NetLogic Microsystems, Broadcom is acquiring a leading multi-core embedded processor solution, market leading knowledge-based processors, and unique digital front-end technology for wireless base stations that are key enablers for the next generation infrastructure build-out. Broadcom is now better positioned to meet growing customer demand for integrated, end-to-end communications and processing platforms for network infrastructure.”
“Today’s transaction is consistent with Broadcom’s strategic portfolio review process and with our focus on value creation through disciplined capital allocation while delivering best-in-class platforms for customers in the fastest growing segments of the communications industry.”
Sensible Move for Broadcom
Indeed, the transaction makes a lot of sense for Broadcom. Even though obtaining NetLogic’s technology for wireless base stations undoubtedly was a key business driver behind the deal, NetLogic addresses other markets that will be of value to Broadcom. Some of NetLogic’s latest commercial offerings are applicable to data- plane processing in large routers, security appliances, network-attached storage and storage-area networking, next-generation cellular networks, and other communications equipment. The deal should Broadcom bolster its presence with existing customers and perhaps help it drive into some new accounts.
NetLogic’s primary competitors are Cavium Networks (CAVM) and Freescale Semiconductor (FSL). Considering Broadcom’s strategic requirements and the capabilities of the prospective acquisition candidates, NetLogic seems to offer the greatest upside, the lowest risk profile, and the fewest product overlaps.
Now the market’s attention will turn to Cavium, which was valued at $1.51 billion as of last Friday, before today’s transaction was announced, but whose shares are up more than seven percent in early trade this morning.
Twilight in the Valley of the Nerds 