Avago Buys Broadcom for $37 Billion in Record Chip Merger

Acquisitive chip maker Avago (AVGO) will acquire rival Broadcom (BRCM) for $37 billion in one of the largest technology mega-mergers on record, resulting in a combined company of some $15 billion in revenue and $77 billion in enterprise value.

Under terms of the deal, Avago will pay $17 billion in cash and 140 million of the company’s shares valued at about $20 billion. Broadcom shareholders, who will own some 32 percent of the combined entity, can elect to receive $54.50 a share in cash, 0.44 ordinary shares in a new Singapore-based holding company, restricted stock equal to 0.44 shares of the holding company, or a combination of the three.

Avago said it will pay for Broadcom with cash on hand and $9 billion in new debt. Broadcom agreed to pay a $1 billion breakup fee if the deal doesn’t go through, according to reports. The deal is expected to close early in 2016.

The companies estimated the merger will result in $750 million in annual cost synergies within 18 months. Broadcom, which employs some 11,750 people, posted 2014 sales of $8.4 billion. Avago amassed $4.3 billion in sales for the 12 months ended November 2, 2014.

Avago chief executive Hock Tan will run the new company, which will be called Broadcom Ltd., as president and chief executive, and Henry Samueli, Broadcom’s co-founder, board chairman and chief technology officer, will join the board of the new company and serve as its CTO. Former Broadcom chief executive and co-founder Henry Nicholas will serve as a strategic advisor and report to Tan.

“Today’s announcement marks the combination of the unparalleled engineering prowess of Broadcom with Avago’s heritage of technology from HP, AT&T, and LSI Logic in a landmark transaction for the semiconductor industry,” Tan said. “Together with Broadcom, we intend to bring the combined company to a level of profitability consistent with Avago’s long-term target model.”

The combined company may be able to pose a competitive threat to chip giants Intel (INTC) and Qualcomm (QCOM). The Irvine, CA-based Broadcom and Qualcomm already have a history of patent squabbles and anti-competitive behavior.

Avago, founded in 1961 as Hewlett-Packard’s (HPQ) semiconductor unit and formed out of Agilent Technologies in 2005, makes RF chips used in Apple’s (AAPL) iPhone and Samsung’s mobile devices.

The Broadcom deal comes only three months after Avago reached an agreement to buy Emulex for $606 million. Avago’s sales have doubled with the acquisitions of LSI for $6.6 billion and PLX Technology for $309 million last year, moves that gained it access to the enterprise storage and data center markets. Avago is ranked as the ninth largest semiconductor company.

Broadcom president and chief executive Scott McGregor said the deal will gain customers “access to a greater breadth of technology and product capability. For our shareholders, the transaction provides both compelling up-front value as well as the opportunity to participate in the future upside of the combined business.”

M&A activity in the semiconductor industry has heated up of late, with December’s $1.6 billion merger of Cypress Semiconductor (CY) and Spansion (CODE), and heavy chatter that Intel is engaged in talks to buy San Jose, CA-based Altera, a fabless $13.4 billion maker of field-programmable gate arrays (FPGAs) now used in telecom and networking equipment and headed into the data center.