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Is Broadcom Overpaying for NetLogic?

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Broadcom (Nasdaq: BRCM  ) starts off the week with a $3.7 billion bang.

The company has agreed to acquire smaller NetLogic Microsystems (Nasdaq: NETL  ) for $50 per share, representing a 57% premium to Friday's close and sending shares to all-time highs. The deal will bolster Broadcom's existing network infrastructure portfolio and is expected to boost non-GAAP earnings per share by roughly $0.10 next year.

Broadcom, an Apple (Nasdaq: AAPL  ) supplier, is hoping to broaden its presence in the 4G chip market. The company would effectively double its addressable infrastructure market. Although both companies' boards have approved the deal, if it falls through for other reasons, NetLogic will be on the hook to pay Broadcom a $127 million termination fee.

NetLogic, which derives a substantial chunk of its revenue from bellwether Cisco Systems (Nasdaq: CSCO  ) , has grown revenue at a compound annual rate of 36% over the past five years because of heavy demand for its high-end processors from network and wireless equipment companies. The company also more than doubled free cash flow last year, despite continuing to operate at a net loss. NetLogic's highly specialized chips will fit in well within Broadcom's broader product offering.

Combining the businesses makes sense. The only part of the deal that I can't say I'm thrilled about is the massive premium. Broadcom recently delivered a strong quarter, with $1.8 billion in revenue compared with NetLogic's recent quarter's revenue of $103.7 million. Before today, Broadcom's market cap stood at $17.7 billion and NetLogic's rested at $2.2 billion. This $3.7 billion acquisition seems a little too expensive for my liking.

The market is expressing its skepticism as investors drove shares down almost 5% throughout the day. Elsewhere in the sector, the acquisition has spurred speculation that rivals such as Marvell Technology (Nasdaq: MRVL  ) may feel pressured to put in a bid for other semiconductor companies, such as Cavium (Nasdaq: CAVM  ) . Also seeing a surge is networking-chip specialist EZchip (Nasdaq: EZCH  ) , which saw its shares leap by more than 10% in early trading.

What do you think? Is Broadcom getting good bang for its 3.7 billion bucks? Share your thoughts in the comments box below.

Fool contributor Evan Niu owns shares of Apple, but he holds no other position in any company mentioned. Check out his holdings and a short bio. The Motley Fool owns shares of Marvell Technology Group and Cisco and has created a bull call spread position on Cisco. Motley Fool newsletter services have recommended buying shares of Cisco. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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