Another fabless step: LSI sells mobile slice to Infineon

August 21, 2007 – LSI Corp., the merged entity of LSI Logic and Agere Systems, is selling its mobility products business to German chipmaker Infineon Technologies for $450 million plus a $50M performance-based bonus, in its latest efforts to carve out noncore operations and transform into a fabless manufacturing business model.

Simultaneously, LSI announced a new share buyback plan to repurchase up to $500 million of its own stock, funded in part with proceeds from the mobility unit sale.

LSI’s mobility group generated revenues of $186 million (150M euros) in 1H07, and revenues are expected to grow sequentially in 3Q vs. $91M in 2Q. The sale — which does not include any production facilities — will save a projected ~$25 million/quarter in direct operating expenses, as well as reduce some indirect costs, with impact to non-GAAP EPS by the end of 2008. About 700 LSI employees will join Infineon. The two firms also have agreed to other deals involving an IP exchange, transition services, and a supply deal.

“The sale of our mobility business will allow us to further focus our efforts on attractive market opportunities in storage and networking, where we have a strong presence, significant differentiation and the scale needed to be successful over the long term,” said Abhi Talwalkar, LSI president/CEO, in a statement.

LSI’s mobile business involves “mainly mobile radio baseband processors and platforms,” and the deal when combined with its recent acquisition of Texas Instruments’ DSL CPE unit, strengthens Infineon’s communications business and its position at important mobile phone makers, stated Wolfgang Ziebart, president/CEO.

Just weeks ago LSI said it would offload its semiconductor assembly and test operations in Thailand (to STATS ChipPAC, for $100M) and Singapore and the US (to unnamed contract manufacturers). In June LSI sold its consumer video chip business to Magnum Semiconductor with terms undisclosed, though Magnum indicated it would get help from private equity.

The deal makes sense, since under LSI the mobile group was “profitable but underfunded and continued to be dependent on one key customer (Samsung) for growth,” according to Doug Freedman, analyst with American Technology Research.

“We believe it makes strategic sense for a number of reasons,” he wrote in a research note. First, the sale boosts confidence in shareholders that the company is aggressively targeting cost savings, both to run the group and to invest in future growth. Also, it was a noncore segment (LSI’s focus is narrowed to storage), which was the stated purpose for the merger with Agere in the first place.

Freedman thinks the group under LSI “was sorely underfunded from an R&D perspective” and that’s a burden now passed to Infineon, along with an increased R&D expenditure. Also, Samsung was the group’s only customer, and though it’s a big client, Freedman thinks the Korean firm has been losing share as 3G sales increase. “We believe the segment needed an increased level of funding in order to capture share with new carriers and achieve scale,” maybe as much as 2x the current investment rate to build scale and multiple customer support, he wrote.


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