On Thursday, semiconductor maker LSI Logic (NYSE:LSI) filed documents with the SEC announcing its plan to spin off its data storage subsidiary in an initial public offering by the middle of this year. The newly formed company, LSI Data Storage, could be auctioned off for as high as $250 million according to lead underwriter for the IPO, Morgan Stanley (NYSE:MWD).
When the offering is complete, the newly formed company will operate as a separate entity. According to the SEC filing, LSI Data Storage would have produced $426 million in operating revenues in 2003 and earned $0.31 per share.
LSI Logic says that it plans to distribute all of the shares that it retains (an as-of-yet-undisclosed percentage of the new company) in what it hopes will be a tax-free transaction to its shareholders by the middle of 2005. LSI, though, will still retain certain rights over Data Storage, and this is where the deal gets interesting.
Even after the full distribution of the shares, LSI Logic will still maintain substantial control over Data Storage. LSI Logic, as part of the terms of the offering, will retain shares of a Class B stock that will have the same financial and voting rights as the Class A shares.
But the Class B shares have a small perk. Their owner will have the unabridged right to appoint 80% of Data Storage's directors. This means, if the filing's language is accurate (and it is slightly ambiguous), that LSI Logic has the rights to control the composition of Data Storage's board for as long as LSI Logic holds most of the shares. LSI Logic does not have any obligation to hold onto Data Storage's shares. Sounds a bit like a "Heads I win, Tails you lose" arrangement.
But the rationale for the spinoff is a good one. LSI Logic isn't really considered a data storage company, and its management believes that the market will be able to understand both elements separate rather than together. LSI Logic acquired Data Storage when it merged with Symbios in 1998. It's not a business LSI focuses on, nor do many of its investors. LSI Logic's share price has greatly tracked the rise and fall of the semiconductor business, not the storage market. So essentially. the separation is a way for management at Data Storage to be compensated on their own efforts and success in business. In many situations where a business is truly an adjunct to the core competency of a corporation, this makes a great deal of sense.
After the spinoff, LSI Data Storage (and yes, they say a name change is imminent) will be entering a crowded market with such massive competitors as Network Appliance (NASDAQ:NTAP), Hitachi (NYSE:HIT), and EMC (NYSE:EMC), among dozens of other competitors. Naturally, management and investors in the newly formed company hope that the thing that held them back -- being hidden within the larger LSI Logic -- isn't also that which made them attractive over these other companies in the first place. For better or for worse, they'll be sinking or swimming on their own.
Bill Mann owns none of the companies mentioned in this article.
