In its largest acquisition ever, California-based Broadcom (Nasdaq: BRCM) has agreed to buy chip maker NetLogic Microsystems (Nasdaq: NETL) for a pricey $3.6 billion.
The announcement sent NetLogic's shares up more than 50%. On the other hand, shares of Broadcom took a 1% haircut. So what does this deal bring to the table for Broadcom? Let's take a closer look.
Too pricey?
Under this deal, Broadcom would buy NetLogic for $50 a share or $3.6 billion. The $50 price tag is a whopping 57% premium to NetLogic stock's closing price prior to the announcement and is nine times NetLogic's sales figures.
The Street is not too impressed with the deal, though. Analysts believe that Broadcom is paying too much for a company that has reported losses for many quarters in the past. The caution on analysts' part appears to be far-fetched and here's why:
Patenting a growth story
NetLogic owns a valuable patent piggy bank that covers a wide range of market-leading network processors. In July, the portfolio was ranked eighth by Industry Impact and by The Patent Board, a patent research firm, as having one of the top 50 patent portfolios.
The acquisition would add 700 valuable technology patents to Broadcom's existing portfolio of 15,000. The company would be able to expand its infrastructure business with NetLogic's chips that would run 3G and 4G mobile networks. These processors can handle enormous quantities of data vital for those who browse and stream videos on their smartphones.
With this acquisition, Broadcom would be able to boost its offerings and keep up with chip rivals Marvell Technology (Nasdaq: MRVL) and Intel (Nasdaq: INTC).
Explosion in online traffic
The heavy price Broadcom is willing to pay highlights the increasing significance of high-speed processors that are used for processing and accelerating data over wireless networks. According to a comScore study, Internet surfers accessed a record 6.9 billion videos in July 2011 alone. This explosion in data traffic from websites such as Google and YouTube has spurred the need for faster network equipment that can meet the growing demand from data-hungry smartphone users.
The Foolish bottom line
I believe Broadcom is making the right move, despite the $3.6 billion price tag, given the fact that wireless data usage is growing at an explosive pace because of the proliferation of data-hungry smartphones. Broadcom should benefit from this acquisition, and I am bullish on this company for the long run.
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