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Old friend

16 Dec 2013 By Robert Cyran

Silver Lake is taking a second juicy bite of Avago Technologies. The U.S. private equity firm just about quintupled its money on the initial carve-out of the chip company from HP. Now it’s back, underwriting Avago’s $6.6 billion purchase of rival LSI. The market’s warm embrace of the deal means Silver Lake’s $1 billion convertible loan is already in the money.

LSI has several attractions to Avago. The purchase helps add a bit of stability to its fast-growing but volatile business of making chips for Apple and Samsung mobile devices. Combining the two companies’ strengths in fiber optics and chips for data center storage should also result in new products to sell.

There’s also a more immediate financial benefit. Avago is incorporated in Singapore, where the corporate tax rate is 17 percent – so the combination will generate tax savings on LSI’s profits. And Avago has identified $200 million of costs that can be cut. If true, the present value of these savings pay for most of the $1.8 billion premium it is paying.

These factors might have been more than enough to convince Silver Lake to back the deal. But the private equity shop also had familiarity. Silver Lake and KKR carved out Avago from HP in 2005. By the time it had fully sold its entire stake, it made five times its investment. Moreover, Silver Lake retained a board seat – so it had an inside view of the company and the transaction.

That, along with the sweet terms of the convertible – a 2 percent yield and strike price just 5 percent above Avago’s close prior to the transaction’s announcement – gave the private equity firm plenty of incentive to take another bite of Avago.

It will be hard for Silver Lake to duplicate its first go-around with Avago. But with Avago shares jumping 9 percent on the morning of the announcement, Silver Lake is already in the money. Avago’s chips are all about connecting people – but connections count even more on Wall Street.


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