LSI Slims, Refocuses, and Gets Ready to Roll

After a busy two years reorganizing LSI Corp., the new leadership of the company, which includes several former Intel Corp. executives, is ready to do battle in the competitive markets for storage and networking chips.

LSI is one of the first major companies to finish reorganizing amid a broad consolidation in the chip sector caused by rising research and development costs. The rising costs means that size matters: Companies need to make enough money to keep up with higher costs for chip designs and upgrades.

Development budgets are rising as the size of transistors and other parts on a chip shrink, said Jeff Richardson, executive vice president of the Network and Storage Products Group at LSI. The size of components on chips, and the spaces between them, has already hit 45-nanometers, a microscopic size thousands of times thinner than a human hair. Without the budgets to continue investing in the machines and research needed to continue the development of chip products, companies will wither.

One of the reasons LSI acquired Agere Systems Inc. late last year is because the networking and storage chips made by the two companies are a much larger, more viable business combined than separate, said Richardson.

LSI is already ready to move forward, which is saying a lot since it has continued to buy or sell companies and divisions for the past several months. The last major deal was the sale of its mobile phone products business to Infineon Technologies AG last month for US$450 million, a deal that will likely give Infineon the size to compete for third place in the mobile handset chip industry.

LSI sold off its consumer products division in July, signed contract manufacturing agreements to allow it to slough off factories and workers, and has bought two chip makers over the past year, including StoreAge Networking Technologies Ltd.

So far, the company has pared its workforce by over a third to 6,000 people.

"We're done with the major moves," said Richardson.

He joined LSI two years ago with several colleagues from Intel, including Abhi Talwalkar, LSI's president and chief executive officer. Talwalkar used to be a vice president and co-general manager at Intel's Digital Enterprise Group, which includes storage and communications products.

The group set changes in motion at LSI to make it more streamlined in terms of its product portfolio, and more powerful in its main business segments -- networking and storage.

"The combination of the companies has already resulted in major design wins," according to Richardson, though he declined to elaborate.

LSI and Agere shared a lot of synergies in storage and networks, which is why the deal made sense, he said. In networking, LSI is now focused on providing chips to telecommunications companies for TV services, broadband, and collaboration. Chips are needed for equipment used in advanced packet processing, advanced traffic management, content inspection, and digital signal processing.

For the storage business, which includes hard disc drives, there are a host of new products either coming out or under consideration at the company, including chips for solid-state drives, Richardson said.

The decision to sell its mobile phone arm wasn't easy, but LSI sees the market as a tough one undergoing consolidation. Two companies dominate in communications chips, Texas Instruments Inc. and Qualcomm Inc., said Richardson, and there's an ongoing battle for a distant third place.

Several major chip makers have opted out of the segment in recent years. Intel Corp., for example, agreed to sell its communications and application processor business last year to Marvell Technology Group Ltd. for US$600 million. This year has seen a few deals, including the LSI-Infineon transaction and the purchase of Analog Devices Inc.'s telecommunications chip products by Taiwan's MediaTek Inc. for US$350 million in cash.

"We believe there will be further consolidation," said Richardson.