When Abhi Talwalkar took the baton from LSI Logic ( LSI) founder Wilf Corrigan in May 2005, he inherited a company that looked as if its best days were behind it.

Still suffering a post-dot-com depression, LSI was undergoing an identity crisis as it adjusted to a changing market for application-specific, or ASIC, chips.

Talwalkar, 42, has not been shy about making changes. The former head of Intel's ( INTC) server business sold LSI's semiconductor fab facility, pruned certain products and overhauled the company's business model.

On Monday, chipmaker LSI Logic said it will acquire Agere in a $4 billion stock transaction, creating a company that will offer semiconductors, systems and software for storage, networking and consumer electronics products.

The combined company would start out with annual revenue of around $3.5 billion.

Since Talwalkar became CEO, LSI's stock has surged about 70%.

Still, LSI's revival remains a work in progress. Sales and profit margins could do better, and the company's consumer electronics business is dangerously undersized.

In an interview with TheStreet.com (before LSI said it would acquire Agere), Talwalkar discusses the state of LSI's turnaround, opportunities for expansion and private equity's newfound appetite for chips.

TheStreet.com: Nine months ago you reorganized LSI around two pillars: storage and consumer. Last quarter's results were overwhelmingly weighted toward storage, with consumer losing ground. Are you still committed to consumer or are you rethinking the strategy?

Talwalkar: Our objective in transforming the company was to move toward multiple growth platforms, or franchises. Being focused entirely on enterprise storage wasn't going to be sufficient to support our growth objectives, as well as feeling that adding some level of diversity is good.

We identified consumer as the second platform to invest in. If you look at that category today, there is no dominant player. It's fragmented and made up of many subscale companies.

Our perspective is that this market is poised to start consolidating over the next couple of years because it's getting fairly big. You've got a billion- or multibillion-dollar market in digital-TV silicon content, you've got the same in the set-top box, you've got the same in DVD players, you've got probably another $800 million to $1 billion in these portable products, and you've got digital cameras.

So you've got a market here that you can probably add up to be $5 billion to $8 billion in size. It's not going to be composed of 30 little companies, and so there's going to be some consolidation.

We felt, and we still do believe, that we're in as good a position as anyone -- especially with our strong balance sheet that gives us strategic alternatives -- to be a leading player across these segments.

Weights and Measures

You've spoken of needing the right scale to succeed in consumer electronics. How do you envision getting that scale?

We've been looking at a number of different strategic alternatives. We know where we're strong and we know where we have to build our competencies to fill out the platform, whether that's through collaborations, through some form of an acquisition or organic investments.

So we're going to be -- and we already are to a large degree -- exercising all of those to build our capabilities beyond just the DVD-recorder space.

What are some other consumer markets you're looking at?

We have been working over the last six months, both organically and looking at inorganic alternatives, to participate in the set-top-box market and the digital-TV market. Our next-generation Domino X architecture will absolutely allow us to participate in these two markets.

We're looking at how we intercept that, but also how we participate sooner. We do have set-top business today. It's been more of an opportunistic approach up until the last six months when we're driving more proactive strategies.

You are in talks to purchase Agere. You recently acquired Metta Technology for $7 million. LSI has $1.3 billion in cash. Let's talk a bit about these moves.

Acquisitions are simply a tool to deliver on a strategy. We know what markets we want to participate in and that tells us, "OK what are we missing to be able to be successful and what's the best way to get that, from time-to-market, leadership technology and cost?"

LSI CEO Abhi Talwalkar

In some cases we may make a small acquisition, but meaningful in terms of the skill set that we pick up to potentially something larger -- or a collaboration.

Nvidia (NVDA) recently acquired PortalPlayer (PLAY) for its system-on-a-chip technology, a similar type of technology that LSI obtained with Metta Technology. Was PortalPlayer something you considered?

We're always looking at whatever might be out there that is consistent with our strategy. The way I'd comment on that is it wasn't going to be a good fit for where we're trying to go. But you could argue that's one of those leading indicators of this market -- this category of products -- going through some level of consolidation.

LSI's top-line growth is currently under 5%.

There's a number of puts and takes because the company is in transition. If you look at our storage business in the third quarter, the overall storage business grew 15% to 17% year over year.

The best way to measure whether our strategy is working, is "are we growing faster than the market in our focus segments?" In storage we can say that across the board, from systems to silicon. In consumer, until we get that level of scale, we're still going to have a little bit of ... not unpredictability, but it's going to be dynamic.

What level of growth is LSI aiming for?

Companywide what we've said publicly is that we need to grow our top line and our bottom line on a consistent basis at a double-digit level.

Is this achievable next year, or is it a long-term goal?

I think it's more near term vs. long term. This isn't something that's five years out. We need to start producing that kind of growth rate pretty soon.

LSI is often cited as a company that has the traits sought by private-equity firms. What are your thoughts on private equity's recent appetite for semiconductor firms?

There's a ton of money out there, and some of the buyouts have been pretty surprising. The most surprising one, at least for some of us in the industry, was Freescale ( FSL).

I think among the concerns out there is that a lot of these private-equity buyouts take on a tremendous amount of debt. A lot of the cash that comes from the cash flow of these companies has to go toward servicing that debt. And then in some cases are you going to put more strain on the businesses relative to helping them grow?

LSI has a clear strategy; we have capital and we have a very strong balance sheet to work with, so it's not like we need money from private equity or the market to go execute our strategy. Also, if we needed to raise more money, we could do that because our debt capacity is very good. So it is not necessarily something we've considered.

Have you had any talks with private-equity firms?No.

As you implement the new strategy, do you see any advantage in not having to manage for Wall Street every quarter?

Well there are pros and cons. And I think as a CEO and a board member, the objective is always to look at the best course of the company and the best option for shareholders.

Do we as a board always evaluate alternatives? Absolutely, that's our job -- it's our fiduciary responsibility. But we believe the current trajectory we're on is the best for our shareholders.

More from Technology

GameStop Jumps 9% on Private Equity Buyout Rumors

GameStop Jumps 9% on Private Equity Buyout Rumors

Worth a Stunning $6.6 Trillion, Tech Stocks Have Taken Over the Market

Worth a Stunning $6.6 Trillion, Tech Stocks Have Taken Over the Market

Here's Why Snap Shares Climbed Monday

Here's Why Snap Shares Climbed Monday

Dropbox Soars in Third-Straight Record-Setting Session

Dropbox Soars in Third-Straight Record-Setting Session

Bitcoin Today: Prices Close to Flat in Low-Volume Trading

Bitcoin Today: Prices Close to Flat in Low-Volume Trading