Last updated: September 12, 2011 4:14 pm

Broadcom buys NetLogic for $3.7bn

Broadcom, the US wireless chip company, announced a $3.7bn cash deal to buy rival NetLogic Microsystems, the latest in a wave of consolidation linked to the growing number and importance of mobile devices.

The deal will extend Broadcom’s ability to make chips used in wireless base stations as operators build next-generation networks. It is the fourth-largest US technology deal this year, according to Capital IQ data.

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The $50 per share offer represents a 57 per cent premium to Nasdaq-listed NetLogic’s close on Friday. NetLogic shares rose 50 per cent to $48 in midday trading on Monday in New York, while Broadcom’s fell 2.5 per cent to $32.60.

Development costs of mobile device chips are driving more consolidation in the industry. Earlier this year, Nvidia, the US chip company, acquired UK rival Icera for $367m in order to bolster its ability to make chips for mobiles and tablets.

Meanwhile, AT&T, the mobile operator, has proposed a $39bn deal to buy T-Mobile USA, as the companies struggle to meet the costs of developing next-generation networks.

Last month, Google announced the acquisition of the mobile operations of Motorola for $12.5bn, as the internet company becomes increasingly involved in the smartphone industry.

Broadcom’s main rival Qualcomm announced a deal in January to buy wireless chipmaker Atheros for $3.2bn, strengthening its positioning in Wi-Fi, where Broadcom had been focusing its efforts. The NetLogic deal boosts Broadcom on Qualcomm’s home turf.

“We like the deal and believe NetLogic will bolster Broadcom’s position in infrastructure, not to mention add to its strength at key customers, such as Cisco,” said analysts at BMO Capital Markets in a note.

Broadcom said it expects the deal to add 10 cents a share to its adjusted earnings in 2012 and it expects to maintain a strong balance sheet, with $4.2bn in cash at the end of this quarter. Both boards have approved the transaction, which is expected to be completed in the first half of 2012.

California-based NetLogic is involved in the manufacture of 4G chips but made losses of $66m on revenues of $382m last year. So far this year, it is thought to have racked up losses of $29m.

Scott McGregor, Broadcom chief executive, said the deal would double the company’s market, particularly as it moved into the market for wireless infrastructure and base stations.

“Customers are looking for complete solutions. This allows us to pull all the technologies together in a space where small companies are having a hard time competing,” he told the Financial Times.

But Alex Gauna, analyst at JMP Securities, said the acquisition of NetLogic was expensive. “Broadcom is paying a very full price at 26 times consensus earnings estimates. It highlights Broadcom’s inability to grow internally. If I were an investor I would be thinking that there goes $3.7bn of my money on something that Broadcom should have been able to build itself.”

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