LSI Logic's lunch: Agere

LSI Logic moves into broadband, wireless and wireline communications through an acquisition of Agere.


LSI Logic is taking over Agere in a $4 billion all-stock transaction. Agere shareholders will receive 2.16 LSI Logic shares for each Agere share they own. The takeover is being presented as a merger but the new company will be called LSI Logic and its president and CEO will be Abhi Talwalkar, currently president and CEO of LSI Logic. Its board will have six LSI Logic nominees and three Agere nominees. LSI Logic non-executive Chairman James Keyes remains in his role. Clearly LSI Logic is having Agere for lunch.

Agere makes semiconductors and software products for OEMS in the storage, mobility, and networking markets. The company's products are found in cell phones, PCs, hard disk drives, as well as broadband communications, wireless and wireline networks. It is the former Microelectronics Group of Lucent Technologies, which was a 1996 spinoff of AT&T.

Agere has not generally been successful and struggled to make consistent profits. Its history includes employee lay-offs, downsizing, losses and decreased revenues. Sales in fiscal 2005 were, at $1.68 billion, down from $1.91 billion in fy 2004.

It went public in 2001 and sales have fallen every quarter for the previous nine quarters. Factories and offices were closed in cost-saving actions. A new CEO, Richard Clemmer, was appointed - shades of LSI Logic - last year to clean the Agere augean stables. He continued with the closures and instituted a stock buy-back program to make investors less frustrated.

Now he has given them something to cheer about by giving them stock worth nearly 40 percent more than the current value of their Agere shares.

LSI Logic makes products at various levels from silicon to systems. They include custom and standard product ICs (integrated circuits), host bus and RAID adapters, storage area network products and software applications.

Talwalkar joined LSI Logic in the summer of 2005, coming from Intel. At the time its Engenio storage division, headed by Tom Georgehens, was positioned for independence via an IPO. Talwalkar quickly stopped that and Georgens left for a position as CEO-apparent at NetApp.

LSI Logic was then a vertically-integrated company and facing troubled times, hence the new CEO. His strategy was to abandon vertical integration and broaden LSI Logic's horizontal appeal to OEMS, its main customers. The Agere acquisition fits in well with this, bring broadband, wireless and wireline communications products into the fold as well as broadening the company's storage product line up.

A key part of his strategy was to become fab-less and leave the silicon foundry business to others. Agere has recently moved to a fab-less strategy too. Talwalkar thinks that the Agere mobile communications products could be a strong line for the new company.

He said: "By joining forces, we expect the combined scale to enable us to extend our franchises in our market segments, realise significant synergies and better serve the needs of our collective customers, shareholders and employees."

The new company will look for increased efficiencies to make savings of $125 in 2008. There are obvious implications for the 9,100 staff but no details on that are available. Support function jobs have been identified as a possible target by Talkwalkar. More facilities may go but a significant presence will be retained in Allentown, Pennsylvania, home of Agere's HQ.

Talwalkar is on a roll. Only last month LSI Logic bought StoreAge, a storage area network (SAN) virtualisation company, for $50 million in cash.

The Agere acquisition is expected to complete in the first quarter of 2007.

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