Why LSI Shares Skyrocketed 39% Today

Wireless chip specialist Avago Technologies  (NASDAQ: AVGO  ) has offered to acquire LSI Corporation  (NASDAQ: LSI  ) for $6.6 billion, as Avago is looking to diversify into enterprise storage while strengthening its wired infrastructure segment. The deal is expected to significantly and immediately be accretive to free cash flow and adjusted earnings per share once it closes. Avago management believes it can get LSI's operating margins up to approach Avago's current level of profitability.

The deal will mostly be funded by debt, but that shouldn't be a problem since Avago currently has no long-term debt outside of capital lease obligations. Avago expects to generate $200 million in annual operating synergies by the end of fiscal 2015, which is significant considering Avago's current operating expenses of roughly $600 million over the past four quarters. LSI generally spends between $200 million and $250 million in operations per quarter. This acquisition will help Avago diversify into a highly complementary business while mitigating any volatility associated with its status as an Apple iPhone supplier.

In this segment of Tech Teardown, Erin Kennedy discusses Avago's acquisition with Evan Niu, CFA, our tech and telecom bureau chief.

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