Avago Technologies Ltd (NASDAQ:AVGO) announced this morning that it had closed a deal to buy Broadcom Corporation (NASDAQ:BRCM) for $37 billion in a combined cash-stock deal. The deal is a $3 billion premium over the Broadcom market cap on today’s market, but shares in both firms are falling in the wake of the announcement.
At time of writing shares in Broadcom stood at $54.97, down 3.82% for the morning’s trading so far. Shares in Avago Technologies were down 2.8% to $137.52. That pullback seems to be a result of a run up in the value of the firms as rumors that the deal was on the way broke on Wednesday afternoon.
Broadcom, Avago deal to create chip giant
The $37 billion deal will be paid for with $9 billion in a new debt sale by Avago Technologies, coupled with cash on hand from its multiple units. The Singapore-based firm will shell out a total of $17 billion in cash in order to acquire Broadcom. The remaining $20 billion will come from a transfer of 140 million shares to current Broadcom shareholders.
Avago said that the combined firm will have a total of $14.2 billion in net debt. The firm expects the deal to be closed in the first three months of next year.
Hock Tan, CEO of Avago called the deal a “landmark transaction in the semiconductor industry.” He said that its strength lay in tying up the tech heritage of Avago with the Engineering prowess of Broadcom.
The deal is the largest that has ever been made in the chip industry, and comes as M&A in the space heats up. Back in March NXP said it would acquire Freescale in a deal valued at close to $12 billion.
Broadcom was, until recently, thought to be on the buy list at Apple. Though that deal would have been bigger than anything Tim Cook has ever handled, it could have sewn up parts of the smartphone supply chain for the iPhone maker.
Shares sink as deal inked
Avago Technologies stock now stands up by more than 8% for the last five days of trading. Broadcom Corporation shares have gained more than 16% in the same period. The pullback seen on Thursday morning may stem from a wide bearish turn on the market today.
The S&P 500 is sitting down 0.32% for the morning at time of writing. The Nasdaq Composite is down 0.33%. In a report on Broadcom released on Wednesday Vivek Arya from Merril Lynch, the investment banking arm of Bank of America, said that it advised clients to Buy shares in Broadcom with a price target of $64.
The Mr. Arya said that the firm’s strength in both mobile and data center technologies could drive its shares up to $68 in the long term.