pldevries

LSI Logic Buying Agere -- No Bargain, But Threat to Marvell

From Lehman analyst report on 2006 Lehman Global Technology Conference:

"Despite last year’s Supplier of the Year Award from Seagate and a recent enterprise storage design win at Seagate, which will begin in FQ2:2008 (April) and could reach $80 million in F2008, Marvell has no other presence at Seagate. Marvell notes that the hard drive business is tough to penetrate, as hard drive manufacturers often prefer to rely on old, yet working components rather than innovative new designs and are known to give their existing suppliers repeat business. In the eyes of hard drive manufacturers, engaging with a vendor whom they have not used is always more risky than engaging with an old partner. Despite these barriers, Marvell remains optimistic about winning designs at Seagate for desktop and laptop drives eventually. Marvell notes that development of their 90 nm read channel commenced three years ago."

In a somewhat unusual pre-merger statement, Bill Watkins of Segate blessed the Agere-LSI merger:
“As valued Seagate partners, both Agere and LSI play an important role in providing products that help us deliver our industry-leading hard disc drives,” said Bill Watkins, Seagate Technology chief executive officer. “We are excited by the innovative possibilities that this new combination represents.” [LSI Dec. 4, 2006 Press Release]

Seagte is both LSI's and Agere's largest customer.

For all of Marvell bravado, Marvell is at heart a price leader. Marvell has never been a technology leader or innovator. Marvell's compact DSP technology allows Marvell to design chips that are more compact and therefor cheaper. As a result, Marvell's client base is largely comprised of tier 2 storage OEMs. Marvell's largest customers are Western Digital (17%) and Samsung (14%) and Toshiba (14%). Of the three, only Toshiba might be accurately characterized as a technology leader and then only in certain HDD segments.

" In fiscal 2006, approximately 55% of our net revenue was derived from sales to four customers, each of whom individually accounted for 10% or more of our net revenue during this period. Of these customers, Western Digital accounted for approximately 17%, Samsung accounted for approximately 14%, Toshiba accounted for approximately 14% and Fujitsu accounted for approximately 10%. Additionally, Wintech, a distributor, accounted for approximately 11% of our net revenue during fiscal 2006. " [Marvell 2006 10-K]

With the economies of scale created by the AGR-LSI merger and the pooling of LSI and Agere's considerable HDD silicon IP and engineering talent, LSI-AGR should be able to handily beat Marvell in the HDD silicon market on all three fronts: price, performance and innovation.