Bloomberg News

Broadcom’s Chip Valuation Signals 39% Gain for Cavium: Real M&A

September 13, 2011

Sept. 13 (Bloomberg) -- Broadcom Corp.’s willingness to pay the most expensive valuation for a semiconductor acquisition in seven years signals Cavium Inc. would be worth 39 percent more in a takeover.

Broadcom agreed yesterday to buy NetLogic Microsystems Inc. for $3.6 billion to gain chips that manage Internet traffic as demand for data-heavy video streaming and online phone calls surges. The company is paying 8.96 times NetLogic’s sales, more than any acquisition greater than $500 million in the semiconductor industry since 2004, according to data compiled by Bloomberg. Using that multiple, Cavium, which also makes processors for communications networks, would be worth $2.2 billion in a takeover, 39 percent more than its market value.

The price tag highlights the rising importance of processors that control the flow of data across the Web after U.S. users watched a record 6.9 billion online videos in July, according to ComScore Inc. While Broadcom agreed to a 69 percent premium, the offer is only 16 percent higher than NetLogic’s record in May. With semiconductor stocks down 19 percent since then, the acquisition may give Broadcom’s rivals Intel Corp. or Marvell Technology Group Ltd. added incentive to buy Cavium or EZchip Semiconductor Ltd., said Benchmark Co.

“This is just a whole new way of computing and processing in the semiconductor world, and there’s just a handful of companies that have the talent and expertise,” Anil Doradla, an analyst for William Blair & Co. in Chicago, said in a telephone interview. “NetLogic was one of them, but Cavium is even more superior. So this absolutely puts them in play.”

Steepest Revenue Multiple

Angel Atondo, a spokeswoman for Cavium, Ehud Helft of EZchip and Daniel Yoo of Marvell didn’t respond to telephone calls and e-mails requesting comment. Amy Kircos, a spokeswoman for Santa Clara, California-based Intel, declined to comment on potential acquisitions.

Broadcom announced yesterday an agreement to buy NetLogic for $50 a share, or about $3.6 billion for the Santa Clara-based company’s equity plus $214 million in net cash, according to data compiled by Bloomberg that includes options.

The transaction, expected to close in the first half of next year, values NetLogic’s equity at 8.96 times sales of $402.8 million in the last 12 months, data compiled by Bloomberg show. That’s the highest revenue multiple for a semiconductor deal greater than $500 million since ARM Holdings Plc agreed to buy Artisan Components Inc. in 2004 for $823 million, or 9.9 times sales, the data show.

‘Opportunistic Time’

“Is this a high price? Absolutely,” David Rudow, a Minneapolis-based analyst for Thrivent Asset Management, which manages $73.1 billion including about 800,000 NetLogic shares, said in a telephone interview. “But it was an opportunistic time for Broadcom to come in and buy them. When you put NetLogic’s technology in the hands of Broadcom’s sales force, it may double their market opportunity.”

Now that Broadcom is buying NetLogic, Cavium may attract potential acquirers from Intel to Marvell and Qualcomm Inc., William Blair’s Doradla said. Cavium may fetch $50 to $60 a share in a takeover, he said, at least a 51 percent premium to yesterday’s close. A representative for Qualcomm declined to comment on potential acquisitions.

Applying NetLogic’s revenue multiple, Cavium would cost $2.24 billion in a takeover, compared with yesterday’s market value of $1.61 billion, the data show. Cavium of San Jose, California, rose 7.1 percent to $33.10 yesterday.

Targeting Cavium

“Cavium’s stock traded up on the belief that they too could be acquired,” Gary Mobley, an analyst for Benchmark in St. Louis, said in a telephone interview. “There may be some merit to that. Intel or Marvell could pay a fairly substantial premium and still have the deal be accretive.”

EZchip of Yokneam, Israel, increased 11 percent yesterday, the biggest gain among companies in the Bloomberg Israel-US 25 Index of the largest Israeli companies traded in New York.

EZchip gained 7.6 percent to $35.13 today in New York, the highest closing price since July 19. Cavium rose 5.4 percent to $34.89, the highest level since July 26.

Soaring Internet traffic and increased online video streaming through websites such as Google Inc.’s YouTube and Hulu LLC are driving demand for wireless-networking equipment that can process the data. U.S. Internet users engaged in a record 6.9 billion online video viewing sessions in July, according to Reston, Virginia-based industry researcher ComScore. About 86 percent of U.S. Web users viewed online video that month, ComScore’s data show.

Internet Traffic

Broadcom, Marvell and Intel all compete in the market for general processors that run Ethernet switches, while processors made by companies such as NetLogic, Cavium and EZchip perform so-called packet inspection, recognizing what type of data is passing through a switch and prioritizing traffic to make a wireless network run faster and more securely.

“Internet traffic is growing in volume and richness,” William Blair’s Doradla said. “You need a specialized set of microprocessors tailored for this.”

Some analysts and investors had speculated that Broadcom would buy Cavium, according to Benchmark’s Mobley and William Blair’s Doradla. Given that Broadcom only expects to have $4.2 billion in cash by the end of the third quarter and the NetLogic deal is all cash, the company is less likely to bid for Cavium, Mobley said. That may leave Marvell as the frontrunner, he said.

“The rationale for making such an acquisition for Marvell would be very similar to that for Broadcom,” Mobley said. “Cavium would fit in the networking business of Marvell. They’d be acquiring more pieces of silicon that would typically be found on” parts of the wireless-networking devices, he said.

Stock Decline

While the offer for NetLogic is 69 percent higher than the stock’s 20-day trading average, it only represents a 16 percent premium to the company’s previous record of $43.28 on May 2. Since then, the stock had fallen 26 percent before the deal was announced, compared with a 22 percent drop for the 30-company Philadelphia Semiconductor Index. Cavium was down 35 percent, while EZchip fell 6.3 percent.

Broadcom is “paying peak value” for NetLogic to gain access to a growing market as consumers utilize more and more data on the Internet from an array of devices, Alex Gauna, an analyst for JMP Securities LLC in San Francisco, said in a telephone interview.

“We are sending more video traffic across the Internet and there is quite a bit of new media,” Gauna said. “Internet bottlenecks are driving growth. Broadcom is willing to pay what it’s paying because it needs that growth.”

--With assistance from Michael Tsang in New York and Ian King in San Francisco. Editors: Sarah Rabil, Daniel Hauck.

To contact the reporters on this story: Tara Lachapelle in New York at tlachapelle@bloomberg.net.

To contact the editors responsible for this story: Daniel Hauck at dhauck1@bloomberg.net; Katherine Snyder at ksnyder@bloomberg.net.


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