Avago, a manufacturer of semiconductors for phone handsets, has bought LSI in a $6.6bn debt funded deal to help the company expand into the rapidly growing area of enterprise storage.
San Diego-based Avago, which makes chips for companies such as Samsung, has agreed to pay $11.15 a share for LSI in an all cash transaction supported by Silver Lake, the private equity group, which is investing $1bn.
Avago, which has a $12bn market capitalisation, will gain a foothold in a key market, as LSI focuses on chips for networks, especially those that control data centres.
Shares in Nasdaq-listed LSI jumped 39 per cent to $10.96 in early trading in New York, while Avago stock was higher by 8.9 per cent to $49.71. The deal values LSI at a 41 per cent premium to its closing price of $7.91 on Friday.
The deal aims to take advantage of the growth in the cloud storage market, which has resulted in large technology companies such as IBM and Hewlett-Packard expanding in enterprise storage, while the valuations of newer private companies such as Box and Dropbox soar.
Hock Tan, Avago's chief executive, said it was a "highly complimentary and compelling acquisition" which would establish Avago as a leader in enterprise storage, as businesses significantly increase the amount of data they store, especially from mobile.
"This combination will increase the company's scale and diversify our revenue and customer base. In addition to these powerful strategic benefits, as we integrate LSI on to the Avago platform, we expect to drive LSI's operating margins toward Avago's current levels, creating significant additional value for stockholders," he said.
Avago said it expects $200m in annual cost savings by the end of its next fiscal year, in November 2015. The deal was funded by $1bn of cash, a $4.6bn term loan from a group of banks and the $1bn convertible note from Silver Lake. The seven-year note carries a coupon of 2 per cent, converting to common stock at $48.04, 5 per cent above the closing price on Friday.
Silver Lake, together with KKR, acquired Avago when it was the former semiconductor arm of HP and took it public in 2009. The leveraged buyout that resulted in Avago was one of Silver Lake's most successful deals, with fivefold returns over seven years. Silver Lake sold the last of its investment last year but retains a seat on the board.
Abhi Talwalkar, president and chief executive of LSI, said the deal provided immediate value to shareholders and new growth opportunities for employees.
The combined company will be jointly headquartered in San Diego and Singapore with more than $5bn in revenues.
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