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LSI/Avago Merger: A Union of Impeccable Lineage

The evolution of the electronics industry is endlessly fascinating. Companies are born, grow up, raise children (spinoffs), die (bankruptcy or acquisition), and then often are reincarnated. A recently proposed multibillion-dollar marriage of two chip companies is a classic example.

In December, Avago Technologies Ltd. announced it would acquire LSI Corp. for $6.6 billion. Each of these semiconductor vendors has a rich, historically significant lineage.

Avago traces its roots back 50 years to Hewlett-Packard Co. Launched in 1961 as a division of HP, the component unit specialized in silicon, germanium, and gallium arsenide diodes for HP's test systems. It pioneered the market for LED displays and later expanded into fiber-optic transmitters, optical mouse sensors, and other equipment.

In 1999, HP announced a strategic realignment to focus on computing, printing, and imaging. The company spun off its test and measurement, component, chemical analysis, and medical equipment businesses as Agilent Technologies. Later that year, Agilent went public, raising more than $2 billion in what was then the largest IPO in Silicon Valley history.

In 2005, the private-equity firms Silver Lake Partners and KKR & Co. bought Agilent's semiconductor products group for $2.66 billion. The group, which the new owners renamed Avago Technologies, was the world's largest privately held independent semiconductor company. In 2009, the owners took Avago public, raising $648 million. In April 2013, Avago acquired CyOptics Inc., a maker of fiber-optic components.

Avago's bride in the latest deal was founded in 1981 as LSI Logic Corp. by Wilfred J. Corrigan, who had worked at another Silicon Valley patriarch, Fairchild Semiconductor. LSI pioneered gate arrays, standard-cell ASICs, and the SoC business. Corrigan served as CEO until 2005. His successor, former Intel executive Abhi Talwalkar, changed LSI's strategic direction; in 2006, he orchestrated its acquisition of Agere Systems Inc. for $4 billion. That move helped LSI expand into the market for standard chips and the networking business.

Agere also had a royal lineage. In 2002, it spun off from Lucent Technologies, which itself spun off from AT&T in 1996. As part of the 1996 deal, Lucent got ownership of AT&T's R&D powerhouse, Bell Labs. The labs were founded in 1925, and over the years its researchers have won seven Nobel Prizes. In fact, the Bell Labs facility in Allentown, Pa., was the site of the first production line of transistors.

Now, two storied chip companies will merge, assuming all goes as planned. (Avago hopes the transaction will be completed by July.) Today LSI's main business is in storage, specifically hard disk drives, storage networking, and solid-state drive chips. Avago has a strong business in base station and mobile handset RF chips (it supplies them for iPhones) and optical components. The combination would create a chip company with $5 billion in revenue and a broader portfolio of communications and networking chips. “The combined company will be strongly positioned to capitalize on the growing opportunities created by the rapid increases in data center IP and mobile data traffic,” Avago said in announcing the transaction.

This is a union of families whose ancestors represent 150 years of some of the biggest innovations in electronics. I wonder what kind of ingenious children would come out of this marriage.

6 comments on “LSI/Avago Merger: A Union of Impeccable Lineage

  1. FLYINGSCOT
    February 18, 2014

    Base station mobiles versus storage solutions…..I am not sure where the synergy lies at this moment.  howeevr I am not a semicon guru and I am sure there is a great opportunity for this merger.  I sure hope so.

  2. Eldredge
    February 18, 2014

    Actually, I think I do see the potential for synergy in this merger – the combination of high density secured data storage and he means to access that data with mobile technology.

  3. Daniel
    February 19, 2014

    “The combination would create a chip company with $5 billion in revenue and a broader portfolio of communications and networking chips. “The combined company will be strongly positioned to capitalize on the growing opportunities created by the rapid increases in data center IP and mobile data traffic,””

    Tam, good step stone and beneficial in long run.  They can tap the business opportunities by offering a complete solution for data centre IP and data traffic; both are hottest & evergreen in industry.

  4. Hailey Lynne McKeefry
    February 21, 2014

    @FlyingScott, if you watch the headlines, there's all sorts of movement in terms of mergers and acquisitions. IBM selling off its chip business. Google purchasing Nest. Facebook investing in a messaging platform. And of course LSI/Avago. I suspect the technology company landscape will look much different a year from now than it does today.

  5. SP
    February 21, 2014

    Its better to get your company into acquisition if it has already performed well for few years and there are takers. Running a company long time has lots of operational challenges unless you want to keep doing same things again and again with equal passion and perfection.

  6. Hailey Lynne McKeefry
    February 23, 2014

    Most of the reports on this merger take a business perspective. Thanks, Tam, for taking a look at how it affects our industry. I saw this statemenr from Avago (printed in NYTimes):

    “This highly complementary and compelling acquisition positions Avago as a leader in the enterprise storage market and expands our offerings and capabilities in wired infrastructure, particularly system-level expertise,” Hock E. Tan, Avago's chief executive, said in a statement. “This combination will increase the company's scale and diversify our revenue and customer base.”

    If you look behind the business speak, it seems like the net result, hopefully, will be improved availablity of producdts in that system level chip space. It's a hopeful sign.

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