DECEMBER 5, 2006
Technology
By Arik Hesseldahl
Plenty of Deals in the Chips
LSI is snapping up Agere, Alcatel acquires Lucent, and Qualcomm grabs Airgo, as the semiconductor industry's mating dance heats up
Consolidation in the semiconductor industry continues apace, with a set of acquisitions in the wireless chip business and another related to storage chips.
The biggest deal of the field took place Dec. 4, when LSI Logic (LSI) said it would acquire Agere Systems (AGR), the former semiconductor unit of Lucent Technologies (LU), for $4 billion in stock. The deal is LSI's bid to boost its presence in the market for chips used in hard drives.
Such deals are occurring against the backdrop of a weakening semiconductor market, setting the stage for further consolidation. The Semiconductor Industry Assn. says sales increased 9.2% in October over the same period a year ago, to $21.9 billion. JPMorgan analyst Chris Danely notes that performance was slower than expected and well off the typical seasonal improvement seen in October. Danely lowered his forecast for 2006 sales to 8% revenue growth for the chip industry as a whole, well below the industry's historical pattern of growing about 15% every year on a compound basis.
Why the slowdown? The scary old inventory monster. Manufacturers ordered more chips than they needed in the months leading up to the holidays, and as such, now aren't ordering as many as chipmakers had hoped they would. This causes an "inventory correction" during which gearmakers burn through inventory before agreeing to buy more, making sales growth tricky for a few quarters.
Ill-Timed IPO The good news is that periods of inventory corrections are usually followed by spurts of heavy chip-buying. "We believe a below-normal first half of 2007 followed by an above-normal second half of 2007 is the most likely scenario, as the inventory correction plays out during the first half of the year and leads to an overshoot on the downside and rapid recovery in the second half of the year," Danely wrote in a Dec. 4 research note.
The past few years have been a bit rocky for Agere, which started its life as a public company in early 2001 with a poorly received initial public offering. The issue came at a time when chip stocks were floundering on the cusp of a nasty industry downturn and was hobbled in part by Lucent's decision to saddle Agere with $6.3 billion in debt.
Allentown (Pa.)-based Agere finished its final fiscal year with $121 million GAAP profit on sales of $1.57 billion. Of that, $625 million in sales, or nearly 40%, was derived from sales of storage-related chips. For the current quarter, Agere had forecast sales of $365 million to $390 million and a per-share profit of 8 cents to 13 cents a share.
A $4 billion acquisition is a big gulp for a smallish chipmaker—it clocked less than $2 billion in sales for the year ended December, 2005. LSI will issue 379 million shares to get the deal done. Agere shareholders will get 2.16 LSI shares for every Agere share.
Revised Outlook Craig Berger, analyst at Wedbush Morgan Securities called the merger "a good strategic combination" in a research note, saying it would give the combined company a strong competitive position against Marvell (MRVL) and Broadcom (BRCM). But he also noted, "While we do believe this acquisition makes good strategic sense with significant product synergy opportunities, LSI's purchase price is not cheap.…LSI will need to reduce combined company costs across both organizations."
LSI President and CEO Ahbi Talwalkar differs with Berger's analysis. "If you look at the premium levels of recent deals, I think this is a very fair deal," he says. After an 11-year stint at Intel (INTC), Talwalkar joined the company in May, 2005, as the handpicked successor to Wilfred Corrigan, who founded LSI in 1981.
LSI shares fell 13.6% on Dec. 4, to settle at $9.12 at 4 p.m. EST on the New York Stock Exchange. Agere gained 8.5% to close at $19.30. On news of the deal, Standard & Poor's revised its outlook for LSI to "positive" from "stable." S&P also affirmed its "BB-" corporate credit rating and other ratings for the company. (S&P, like BusinessWeek, is a unit of The McGraw-Hill Companies.)
So Long, Lucent The deal was LSI's second acquisition in as many months. Last month, it shelled out $7 million for Metta Technology, a small India-based company focused on chips for consumer electronics. In July, LSI sold off its digital signal processor chip design unit to VeriSilicon, a Chinese chip company.
In an interesting coincidence, LSI announced the Agere deal on the same day Alcatel said it had completed its acquisition of Agere's former corporate parent, Lucent. That deal forms Alcatel-Lucent (ALU) and closes the book on one of the telecom industry's most storied companies, once the manufacturing arm of the original AT&T (T).
LSI's move to acquire Agere also came the same day that wireless chipmaker Qualcomm (QCOM) grabbed Airgo Networks, a startup focused on developing advanced Wi-Fi chipsets around a technology known as MIMO, which stands for Multiple Input/Multiple Output. Additionally, Qualcomm said it would spend $39 million to acquire certain operations of chipmaker RF Micro Devices (RFMD).
Growing Trend Investors seemed pleased, sending Qualcomm shares 3.2% higher, to close at $37.50 on the Nasdaq Dec. 4. Qualcomm Vice-President Sanjay Jha says the Airgo deal fits with the San Diego company's strategy to develop products that combine several wireless technologies into a single device. Airgo's technology has been used primarily in Wi-Fi products for notebook computers and has been considered a contender as the underpinning of the forthcoming standard in Wi-Fi networking—called 802.11n—which the IEEE is expected to finalize by mid-2007. But Airgo's technology has already been used in Wi-Fi products from companies including Belkin and Cisco Systems (CSCO) unit Linksys.
Airgo's MIMO technology uses several antennas to divide a single wireless-data signal into several smaller, separate signals sent at the same time, after which they're reassembled by the receiver into a single signal. The result is a Wi-Fi signal that can hit peak speeds of 350 Mbps, vs. 54 Mbps with current technology based on the older 802.11g standard.
The consolidations are only the latest in a series. Last month, Advanced Micro Devices (AMD) acquired graphics chipmaker ATI (ATYT). Also last month, Nvidia (NVDA) acquitted PortalPlayer (PLAY), the company best-known for making the chip that powers Apple Computer's (AAPL) iPod music players.
Meanwhile Freescale Semiconductor (FSL), the former chip unit of Motorola (MOT) was acquired for $17.6 billion by a consortium of private equity investors, including The Carlyle Group and The Blackstone Group.
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