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Agere Systems (AGR) yesterday morning said that due to “inventory corrections at several leading customers in its networking and storage businesses,” the company now sees revenue for the fiscal second quarter ending March down 12 percent from the $372 million reported in the December quarter.

Previously, the company had forecast flat sequential revenue.

That’s not good news for LSI Logic (NASDAQ:LSI), which is in the process of buying Agere.

Agere does say that the miss is “a short-term revenue correction and not a fundamental change in its future business outlook.”

Craig Berger, an analyst at Wedbush Morgan says he was “disappointed with the news.” He says “some may even feel that Agere was ‘window dressing’ its current results” to get the deal done." That said, Berger maintains a Buy rating on LSI, and maintains that the merger “should drive better than expected cost savings synergies.”

Based on the Agere news, Berger cut his 2007 estimate for LSI to 50 cents a share from 55 cents; for 2008 he goes to 65 cents a share from 73 cents. He also cut his target price to $12 from $13.

Yesterday, Agere was down 83 cents, or 3.8%, to $21.31; LSI was off 29 cents, or 2.9%, at $9.98. The terms of the deal call for each Agere share to be exchanged for 2.16 shares of LSI; that puts the current value of the deal at $21.56 a share. While the spread has widened slightly - Agere on Friday was trading at just a 4 cent discount to the merger price - the market still seems to think the merger should close.

Source: LSI Slips On Weak Outlook From Agere