Diversification isn't always a great idea -- you've heard about business-crippling "diworsification," right?

On that note, chip designer LSI (NYSE: LSI) has decided to refocus on being a chip designer and nothing else: The company is selling the division that makes external storage systems to storage specialist NetApp (Nasdaq: NTAP).

LSI's storage segment has a history of making an operating profit even in lean times, but the division always looked like an odd duck alongside a product portfolio full of silicon chips. As a pure semiconductor designer in the storage and networking markets, LSI hopes to "accelerate the achievement of our current business model, establish a richer business model target, and deliver greater long-term shareholder value."

The $480 million payment from NetApp should certainly help LSI accomplish those goals. The company now looks more like chief rivals Marvell Technology Group (Nasdaq: MRVL) and Broadcom (Nasdaq: BRCM), and should put up a stronger fight when Seagate Technology (Nasdaq: STX) is picking a storage controller or Dell wants a networking chip. Tight focus can be a very good idea.

On NetApp's side of the table, LSI's storage unit collected about $700 million in 2010 revenue, some of it in markets that NetApp doesn't serve today. The unit is already profitable and should add to NetApp's bottom line in short order. It's a quick path toward catching up with industry giants IBM and EMC (NYSE: EMC) in terms of market share, though the deal is nowhere near enough to magically close the gap. And then the cross-selling to new customers can commence.

But investors seem to fear that NetApp overpaid for LSI's assets, as LSI stock jumped on the news while NetApp tanked. This is the largest buyout NetApp has ever done, yet it pales in comparison to Western Digital's (NYSE: WDC) paying $4.3 billion for the enterprise-class drive division of Hitachi. The storage sector is consolidating very quickly -- maybe NetApp needs to think bigger?

Make sure you don't miss the next acquisition by adding NetApp, EMC, and IBM to your watchlist. It only takes a couple of clicks, is totally free, and comes with some nice extras to boot.

Fool contributor Anders Bylund holds no position in any of the companies discussed here. The Fool owns shares of EMC, IBM, Marvell Technology Group, and Western Digital. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. You can check out Anders' holdings and a concise bio if you like, and The Motley Fool is investors writing for investors.