LSI’s Change Artist

Date:   Thursday , February 01, 2007

On December 4, 2006, LSI Logic announced its merger with Agere Systems, the erstwhile semiconductor unit of Lucent Technologies, in an all-stock transaction. Valued at approximately $4 billion, it was the biggest ever deal in the semiconductor space.
The merger bolstered Milpitas based LSI Logic Corporation’s position in a big way. All the while, while LSI focused on chips for managing disk drives and communications between computers and data-storage systems, Agere developed data-storage and generic chips used in networking devices and cell phones. The combined entity poses as a “formidable competitor” across all parts of the data-storage, networking and consumer electronics market.

Steering the mega-merger was Abhi Talwalkar, successor to Wilfred Corrigan, the founder of LSI. Corrigan made way for Talwalkar in May 2005 at a time when the going was not too good: LSI Logic had reported GAAP losses of $464 million for 2004, and rumors were rife in the industry circles of the company staring down the barrel.

In 18 months since he took over, Talwalkar has scripted a phenomenal turnaround for the longtime ASIC company. Among key decisions, he has redirected R&D from non-core areas and reduced associated selling, general and administrative expenditures. As a result, some of the old platforms like RapidChip have been phased out, and the company has moved into a fabless mode. The narrowing of its end market focus has given birth to a market-leaning unit prepared to seize the day. Looking ahead, the merged LSI Logic Corporation will focus on franchises in the growth market—in the networking space and the mobility and consumer arena.

Cajole, Communicate, Conquer
For Talwalkar, the most satisfying part of getting LSI back in business has been building a management team that shares ‘a high chemistry’ and is attuned to his vision for the company. Quite a bit of it is done through infusing fresh blood at the upper echelons, as was necessary; much of the erstwhile LSI management knew how to drive operational expertise around a service but the re-emergent LSI needed ‘leaders from the market place’—ones who had the experience and skills in building franchise within focused markets.
“That’s why we brought in people from outside and also elevated certain individuals who demonstrated such expertise in their respective product lines,” notes the CEO. While these changes were taking place at the top, insecurity and suspicion was imperative among the lower cadres.

To quell any fears among the employees, he visited as many LSI facilities as he could, holding open forums, one-on-ones and skip level meetings, and communicating, more importantly, that the company was on a journey in a different direction. In these interactions, he laid bare all the ‘bad things’ the company was going through as he did with all the positive happenings around. The transparence helped him win the trust and in a little while, see his vision percolate down to the lowest level.
He kept the communication channels open with monthly e-mails, which eventually transformed into blogs on company affairs.

For the first 90 days in his tenure, Talwalkar spent nearly half his time interacting with customers, understanding their strategies, and how LSI could support them. Then, he reached out to analysts in a big way over the last one year, trying to communicate the company’s new stand. The results are more than visible today: Share prices are up from $5.3 in May 2005 to $ 9.3, while the market cap has seen a $1.6 billion rise to touch $3.74 billion.

Upping the Gut Gear
Talwalkar started the process of restructuring the ASIC company with one foot firmly in the past. He analyzed how the ASIC landscape had changed during the last 5 years and how it was going to evolve. In parlance, he studied LSI’s technology expertise areas, the positions it had in different markets, and how it could bring together different capabilities to deliver a unique value proposition.
Then began a two way process: The strategy had to be formulated keeping in mind the organizational form and leadership skill-set, while the leadership team would need to be tweaked in a way so as to conform to the new strategy. The two aspects started proceeding on parallel tracks.

First up, on the strategy front, Talwalkar decided to focus on fewer markets, and move upstream in them versus catering to the innumerable spaces LSI was addressing then. He adopted a stance similar to Geoffrey Moore’s ‘bowling pin strategy,’ where the head pin is the initial target vertical and the other pins are the eventual market expansion. He envisioned LSI conquering the storage vertical and then bridging over to other verticals.

In keeping with this strategy and buoyed by a strong gut feeling, he sold off the company’s fab in May 2006 for $105 million. “In the long term, it was inevitable that we would become a fab-less company. We simply accelerated the decision,” he says. Moreover, it needs anything between 6-10 billion dollars of annual revenue to be able to support a fab and develop new process technologies, and that was something LSI did not have. Though there was one school of thought within the company, which felt strongly that there would be sufficient financial abilities to support the fab for another generation, the gutsy CEO decided otherwise.

Following the gut trail further, he decided on setting right the agnostic nature of LSI’s RAID software; Historically, it had a knack of supporting other silicon architectures. 3 months into his tenure, the LSI team decided that the RAID software from then on would support only LSI’s own silicon. The tight integral association between the software and silicon has been the bait for a number of significant tie-ups LSI has struck in the past twelve months.

Talwalkar has been successful in ending a long unhappy streak of LSI losing money each year since 2001. The company managed to post a profit every quarter in 2006; in fact it earned $75 million during the three months ending December 31 ’06, 47 percent more than it did during the same period last year.

Despite the advances, the second generation Indian refuses to call the rise in LSI’s fortunes a turnaround. For him, it is still a work in progress. “We’re not done yet,” he states. “This is not a company that has been turned around. We’re in the midst of a transformation, and are slowly getting back into the game.”