LSI headed in different direction in old building

It’s been a busy year for LSI Logic Corp.

In Fort Collins, the company sold one building, renovated another and moved employees between the two. On a grand scale, the company announced a new focus and is already acting on it. In early December, the company announced it would merge LSI with Allentown, Pa.-based Agere Systems Inc.

Under the terms of the agreement, the companies will merge in an all-stock transaction, and the newly formed company will operate as LSI Logic Corp. Agere shareholders will receive 2.16 shares of LSI stock for every one share of Agere stock they own. Using LSI Dec. 1 price as a base, the transaction will represent a per-share value of about $22.81 for Agere stockholders. All told, the deal is worth about $4 billion.

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The companies expect the deal to result in “a semiconductor and storage systems powerhouse,” according to a press release.

“We are actually creating a much bigger company with better scale in the semiconductor industry,´ said Jeff Richardson, LSI’s executive vice president of the Custom Solutions Group. “The merger together is actually a highly complementary fit.”

LSI is known for its work in the storage and consumer electronics markets. Agere also has a presence in storage, but holds a larger share of the mobility and networking markets. Richardson explained that there were very few areas in which the companies overlapped or competed in the same markets.

Logical move

Analyst opinion seems to be that the LSI-Agere merger – which some view as an LSI-led acquisition – is a logical business move, but perhaps a little pricy. Upon the announcement, Standard & Poor’s Ratings Service affirmed LSI’s corporate rating of BB-, but revised the company’s outlook from stable to positive.

“The ratings reflect LSI’s good liquidity and asset-light operating model, offset by the company’s reliance on a limited customer base and the challenges caused by long design cycles for its products and high costs of certain key components,´ said S&P credit analyst Bruce Hyman.

The ratings analysis added that the acquisition of Agere would broaden the customer base and “is expected to provide some operating cost savings as well as an enhanced business position with some key customers.”

Wall Street was a little less kind. On the trading day before the deal was announced, LSI’s stock was trading as high as $10.70. Since then, it has gone as low as $9.02 and ended the trading day on Dec. 15 at $9.36.

Richardson said that the deal will provide the company with a much bigger revenue base. LSI reported sales of $1.9 billion for 2005. Agere had $1.57 billion in sales for the fiscal year ending Sept. 30. This could translate into good things for the company’s Fort Collins site.

“For the specific effect, its too early to tell,” Richardson said, but added that Fort Collins is an integral part of LSI’s business.

He said that post-acquisition, the company is likely to continue to expand its resources at the site.

This year, LSI added about 30 Fort Collins employees. The company now employs 260 in its newly remodeled facility on Danfield Court. LSI also operates a facility in Colorado Springs and will acquire a Longmont team of about 80 employees when the merger is complete.

Major refocus

All of the changes this year were spurred by a major refocus for the company.

On March 6, LSI announced its storage and consumer markets would become priorities. Dubbed “The New LSI,” the changes were introduced in a strategy update conference call.

LSI shared its plans to discontinue or divest businesses not in line with the new focus. For instance, LSI will stop further development on its RapidChip platform for application specific integrated circuits, or ASIC, technology; the company also intends to sell its ZSP digital signal processor unit.

Many of the company’s local engineers have been working on mixed-signal ASIC design. However, the announcement that the company will shift away from merchant ASIC markets to focus on storage isn’t bad news. LSI will still work with ASIC design as it relates to its new focus areas of storage and consumer products.

In a May 2005 interview with the Business Report, an LSI spokesman described the mixed-signal design work in Fort Collins.

“Our largest market is storage components,” he said. “A key component of that success is mixed-signal design.”

LSI’s two centers of excellence for mixed-signal design are Fort Collins and Colorado Springs. In Fort Collins, the storage component work focuses on custom mixed-signal circuits.

A discussion with LSI spokeswoman Tara Yingst after the March 6 announcement also confirms that the Fort Collins site is going to be key to LSI’s new model.

“LSI’s engineering and marketing activities in Fort Collins are well aligned with the company’s new strategic direction,” she said. “Also, our test, product engineering and failure analysis capabilities in Fort Collins will continue to be a vital part of the LSI infrastructure.”

Richardson added that also this year, Fort Collins became LSI’s sole location for its Production Failure Analysis group. The team is charged with investigating customer issues with LSI products using expensive, intricate tooling.

“We have consolidated all of that to the Fort Collins site,” he said.