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Avago Technologies joins enterprise storage fray with LSI acquisition

Avago Technologies announced a $6.6 billion deal to acquire components provider LSI Corp. and turn Avago into a major HDD and SSD components provider.

Avago Technologies became the new kid on the storage component block this week when it spent $6.6 billion to acquire LSI Corp.

Avago executives said they expect the deal to close in the second quarter of 2014, and the combined company could generate more than $5 billion in annual revenue.

Avago Technologies designs and develops semiconductor devices mainly for fiber optic networks and wireless communications networks. LSI manufactures storage-system components, including hard disk drive (HDD) Systems on Chip (SoC) that integrate hard-disk controllers, double data rate memory and read channels on a single chip, RAID controller cards, RAID on Chip (RoC) integrated circuits, SandForce flash controllers and PCIe flash cards.

Avago CEO Hock Tan called the LSI deal a "transformational transaction" for his company. "[The LSI acquisition] opens up an area where Avago has not been a major player until now," Tan said, referring to the multi-billion dollar enterprise storage market where LSI is a well-known name.

Since selling its Engenio storage array division to NetApp in 2011, LSI has concentrated on storage components. Henry Baltazar, a senior analyst with Cambridge, Mass.-based Forrester Research, said that LSI's RAID controller business could be a hidden gem for Avago as software-defined data centers and software-defined storage systems become more prevalent. "As people start moving toward those software-only models, well, software has to run on something, and it's probably going to be a server, potentially with an LSI RAID controller," Baltazar said.

According to Bob Wheeler, a principal networking analyst for Mountain View, Cal.-based Linley Group, the LSI acquisition will bring Avago into the enterprise storage market with little overlap with Avago's existing products.

"It helps diversify Avago's business somewhat," Wheeler explained, "and where they have similar businesses, they mostly have different customers."

Both companies build custom application-specific integrated circuits (ASICs) for wireless networks. Avago manufactures ASICs for radio frequency devices, while LSI builds digital-processing chips. "So now [Avago] becomes a real powerhouse in terms of being an ASIC vendor to large OEM customers that design their own chips," Wheeler said.

Avago's Tan said the vendor's wireless networking business currently makes up approximately 50% of the company's total revenues. With the LSI acquisition, that number will drop to around 25%. Abhi Talwalkar, LSI's CEO, said about 78% of LSI's business is storage-related and 17% is networking.

During a conference call announcing the deal, Tan said he was impressed with LSI's enterprise storage and data center presence, HDD component manufacturing, and storage and server connectivity, which Tan said was "practically a franchise." Tan specifically pointed out LSI's SoCs, RAID controllers and RoCs.

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