LSI Logic Spins Off Storage Systems

LSI Logic Corp. (NYSE: LSI) granted LSI Logic Storage Systems Inc. its declaration of independence today, saying it plans to spin the growing segment off into a separate company (see LSI to Spin Off Storage Systems Unit).

LSI Logic Storage Systems is currently a wholly owned subsidiary of LSI Logic Corp. LSIs board gave management the go-ahead to pursue the split, and the parent company is considering an IPO for the storage systems company in the first half of 2004. If an IPO takes place, LSI may distribute the remaining shares of the storage business to stockholders in a tax-free transaction or sell or hold a portion of the sales.

Initial investor reaction was positive: LSI Logic’s stock price rose sharply and traded at its highest point since Sept. 25.

The split would result in two companies, one selling storage systems and the other semiconductors. Tom Georgens, president of the LSI Logic Storage Systems subsidiary for the past five years, will become CEO of the new storage systems company. LSI Logic CEO Wilfred Corrigan said the storage subsidiary’s executive team will remain in place.

“We anticipate that a separation will intensify the market focus and strategic direction of the two companies,” Corrigan said in a statement.LSI Logic Storage Systems has been successful selling its high-performance, low-cost storage arrays to OEMs. It has reported six straight quarters of year-over-year revenue growth. Its third-quarter revenues of $104 million represented 23 percent of LSI Logic’s overall revenue. For the first nine months of 2003, the storage systems segment generated $305 million in revenue, or 25 percent of the overall company revenues.

LSI Logic Storage Systems increased revenue by 20 percent in the third quarter and by 33 percent for the first nine months of the year. That follows a 59 percent increase in 2002 over the previous year.

When announcing third-quarter revenues in October, Corrigan said the storage systems group was on track for a record year in 2003 and forecast a record fourth quarter.

LSI’s executives say its growth drivers have been the industry trend toward modular storage and the company’s successful channel strategy over the last 18 months. LSI has OEM deals with IBM Corp. (NYSE: IBM), Storage Technology Corp. (StorageTek) (NYSE: STK), the Teradata Division of NCR Corp., and Silicon Graphics Inc. (SGI) (NYSE: SGI), with IBM generating far more revenue than any of the others. One challenge the new company will face is to diversify its customer base to make it less reliant on IBM (see IBM Kicks Up Midrange Storage).

“We expected this to be in the works for a long time,” says John McArthur, group VP of storage research at IDC. “I think LSI rightfully believed they weren’t getting adequate public attention for the size of their business. And the methods and investments of a semiconductor business are different than the methods and investments of a storage systems business.”LSI hasn’t said how many of its 5,000 worldwide employees would work for the new company, but McArthur says it’s a good idea to leave the storage system’s executive team intact under Georgens.

“Georgens has been acting like a CEO anyway,” McArthur says. Now he may become one for real.

— Dave Raffo, Senior Editor, Byte and Switch