LSI Logic Corp. said Monday that it would purchase rival storage and communications chip maker Agere Systems Inc. for $4 billion in stock, a move that would help it expand into the fast-growing market for the electronic brains of portable gadgets.
Agere shareholders will receive 2.16 shares of LSI for each Agere share held, valuing Agere at $22.81 a share. The purchase price represents a 28% premium to Agere’s Friday closing price of $17.79.
Shares of Allentown, Pa.-based Agere rose $1.51, or 8.5%, to close Monday at $19.30, while LSI, of Milpitas, Calif., fell $1.44, or 13.6%, to $9.12.
Agere traces its history back to AT&T;'s famed Bell Labs. It was spun off from Lucent Technologies in 2001. Lucent, for its part, has just merged with Alcatel of France to form Alcatel-Lucent.
The acquisition of Agere boosts LSI’s business in cellphones, MP3 players and other portable media devices, and provides a chance to improve efficiency and cut costs. LSI’s chips are found in computer hard drives, DVD recorders and other devices, but the company doesn’t have a strong foothold in mobile devices.
The combined company will use the LSI Logic name and have about 9,100 employees. It will be headquartered in Milpitas but maintain a “significant presence” in Allentown.
Job cuts would be likely, but the company did not say how many positions would be trimmed.
“It’s likely in cases such as this there will be an overlap in functions,” LSI President and Chief Executive Abhi Talwalkar said.
In a conference call with analysts, Talwalkar said the company would have an edge in several markets, including storage, networking and consumer electronics.
Said Jim Feldhan, president of Semico, a semiconductor research and consulting firm in Phoenix, “It gives them a good entree into the mobile arena. The mobile market has become the largest market for chips.”
Feldhan said it costs millions of dollars to design a chip, and the expense is better justified for products that target fast-growing markets, such as mobile devices. Nearly 1 billion cellphones are expected to be sold this year, for example, and by 2010 that number will rise to 1.2 billion, Feldhan said.
LSI plans to issue about 379 million shares to complete the acquisition. LSI shareholders would own 52% of the combined company, and Agere holders would own 48%.
The two companies had combined revenue of $3.5 billion for the 12-month period that ended Sept. 30. Together, they own more than 10,000 issued and pending U.S. patents.
Talwalkar and LSI nonexecutive Chairman James Keyes will remain in their roles at the new company.
The new board will have nine members, with six directors designated by LSI and three by Agere.