LSI Logic Strong-Arms Storage Sector

The $4 billion acquisition that LSI Logic(LSI Quote) announced Monday did not come out of the blue.

The chipmaker had frequently hinted in the past months that it was looking to bulk up in order to better compete in its target markets.

But LSI's decision to pair up with Agere Systems(AGR Quote) in an all-stock merger still came as a surprise to many on the Street.

Rather than bolster its undersized consumer electronics business, which management had indicated was a priority, LSI took a different tack, effectively signaling a shift in its recently unveiled plan.

Shares of LSI fell more than 13%, or $1.46, to $9.10 on the news. Agere investors, on the other hand, applauded the deal, sending the stock up about 8%, or $1.48, to $19.27.

By joining forces with Agere, LSI fleshes out its storage chip business -- an area in which LSI is already strong. The deal also positions LSI to play a larger role in networking and appears to reroute its consumer electronics plan to the cell-phone market: Agere makes baseband chips for cell phones and boasts No. 3 handset maker Samsung as a key customer.

In a conference call with analysts after the merger announcement, executives of the two companies spoke of creating a storage, networking and consumer powerhouse, with combined annual revenue of $3.5 billion, more than 9,000 employees and an impressive patent portfolio and R&D capability.