LSI Logic Goes Fabless

The company sells its only fab facility to On Semi.
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LSI Logic's

(LSI) - Get Report

transformation into a fabless chipmaker became official Thursday when the company announced it sold its sole fabrication facility to

On Semiconductor

(ONNN)

.

The 83-acre wafer-fabrication compound in Gresham, Ore., which LSI put on the auction block in September 2005, fetched $105 million in cash.

The deal involves an intellectual property licensing agreement and calls for LSI to purchase approximately $200 million of wafer supply and certain test services from On Semi over an initial period of two years. LSI will have access to wafer supply and test services from the facility for up to four years under additional terms to be negotiated after the two-year commitment.

Under the terms of the agreement, On Semi will retain "substantially all" of the manufacturing workers at the facility, with the nonmanufacturing staff expected to stay with LSI.

"We are very pleased to have secured a buyer interested in both the advanced manufacturing capabilities and the experienced workforce associated with our Gresham facility," said LSI CEO Abhi Talwalkar in a statement.

LSI said it does not expect to record a loss with the sale.

In a note to investors, Wedbush Morgan analyst Craig Berger said the deal was a win for both companies, reducing LSI's costs while providing On Semi with leading-edge manufacturing capacity. (Wedbush makes a market in LSI and On Semi securities).

Investors appeared less enthused, however, bidding down shares in both companies. Shares of LSI fell 2.7%, or 31 cents, to $11.35 in midday trading. On Semi shares were down 4%, or 29 cents, to $7.02.

On Semi said the transaction is expected to result in a slight reduction of approximately 100 basis points to its 2006 gross margin. Although On Semi's first quarter ends in about one week, the company stuck to its guidance of $330 million in revenue with 35% gross margin. The company also announced an offering of 10.6 million shares to finance the acquisition.

While LSI had initially projected that the sale of the facility would take about a year, the company said it expects the deal to close in the next 45 days, pending regulatory approval.

The sale is the latest step in a reorganization at LSI being led by Talwalkar. In March, the company announced that it

was shifting its focus to consumer and storage markets and selling off a line of communications chips and discontinuing development on anther product line.