Avago Technologies Announces Acquisition Of CyOptics And Share Repurchase Program

Apr.12.13 | About: Broadcom Limited (AVGO)

Shares of Avago Technologies (NASDAQ:AVGO) are trading roughly unchanged in Thursday's trading session. The designer and developer of analog semiconductor devices announced the acquisition of CyOptics, a leader in Indium Phosphide optical chips and component technologies.

The Deal

Avago Technologies announced that it has agreed to acquire CyOptics for a total purchase price of approximately $400 million in cash.

CyOptics. which serves the data communication and telecommunications industry, will strengthen Avago's fiber optics portfolio for emerging enterprise and data center applications. As such, Avago will service its customers with a more complementary optical components portfolio in the long term.

CyOptics activities, once developed at Bell Labs and Lucent, hold a broad product portfolio and strong customer base, including the lead module and systems OEMs. CEO Hock Tan commented on the deal:

We believe CyOptics' leading InP technology and optical manufacturing capability will strengthen Avago's fiber optics portfolio and accelerate our ability to capture next generation 40G and 100G enterprise and data centers. With CyOptics, we also see interesting revenue growth opportunities in delivering a broad range of proprietary components to the market.

For the year 2012, CyOptics generated revenues of $210 million, up 21% on the year before. As such, the deal values the company at 1.9 times annual revenues. Avago did not specify whether it expected to achieve synergies following completion of the deal, or whether the transaction would be dilutive or accretive to earnings per share.

The deal, which is expected to close in the third quarter of Avago's fiscal year of 2013, is subject to normal closing conditions, and regulatory approval.


Avago ended its first quarter of its fiscal 2013 with $1.15 billion in cash and equivalents. The company operates with merely $3 million in capital lease obligations, resulting in a solid net cash position. The company generated first quarter revenues of $576 million, up 2% on the year before. Net income came in unchanged at $125 million. At this rate, the company is on track to generate annual revenues of roughly $2.3 billion, on which it could earn just north of $500 million.

The market currently values Avago Technologies at around $8.7 billion, which values the operating assets around $7.5 billion. This values the company at around 3.3 times annual revenues and roughly 15 times annual earnings.

Avago currently pays a quarterly dividend of $0.19 per share, for an annual dividend yield of 2.1%.

Some Historical Perspective

Avago Technologies went public as recent as August of 2009. The Singapore based company sold its shares to the public at $15 per share. Shares steadily gained ground, reaching highs of $39 halfway through 2011. From that point in time, shares have moved in a $30-$40 trading range, currently exchanging hands around $35 per share.

Between 2009 and 2012, Avago increased its annual revenues by some 60% to $2.4 billion last year. The company steadily improved its earnings, generating profits of $563 million over the past year.

Investment Thesis

Shares of Avago hardly react to the deal with CyOptics, which seems rather favorable, and really adds to Avago's operations. With the acquisition, Avago stands to increase its annual revenues by almost 10%. The revenue multiple seems rather favorable at 1.9 times annual revenues, which compares to Avago's own valuation of 3.3 times annual revenues. Even more interesting, CyOptics has rapidly grown its revenues in the recent past, outpacing growth at Avago. The company reported a 21% increase in total revenues over the past year, and even tripled its revenues over the past three years.

There was even more good news. The board of Avago approved a new 20 million share repurchase program, which is to replace the current 15 million share repurchase plan. The new plan will expire before the annual general meeting in 2014. The authorized plan allows the company to retire roughly 8% of its shares outstanding.

As demand for Apple's (NASDAQ:AAPL) iPhone's is subdued, the prospects for suppliers like Avago Technologies have diminished. Yet the company is putting its excess cash at work, by announcing a nice addition by acquiring CyOptics. The deal will add to revenues at relative cheap valuation multiples, and boost its growth profile. The new share repurchase program will provide a lot of support for shares as well.

Overall, the news on Thursday is net positive for shareholders, who are hardly reacting to the positive news. The recent events will most likely support the share price action in weeks to come.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.