CASE: LSI Logic Corp.
CASE: LSI Logic Corp.
In the late 1970s, Wilfred Corrigan, the British-born chairman and president of Fairchild Camera & Instrument Corp., sold Fairchild to Schlumberger Ltd. Approximately one year later, in November 1980, he started LSI Logic Corp., a manufacturer of custom-made microchips based in Malpitas, California. Although Mr. Corrigan's idea of custom-made microchips sounded unconventional at the time, he was able to use his
record at Fairchild to convince some U.S. venture capitalists in January 1981 to invest nearly $7 million in the new firm.
The company had only four employees at this point, but since Corrigan had solved two key issues—the nature of the product and the initial infusion of cash—there was a solid foundation for growth. Corrigan now had to decide how LSI Logic should service its customers worldwide, and how and where it would raise capital to keep expanding.
Global Strategy Mr. Corrigan learned from his experience at Fairchild that a producer of mi-
crochips had to think globally in terms of the location of production and the consumer. He quickly decided that in order to be successful, he needed to concentrate on being in three key geographic areas—Japan, the United States, and Europe (illustrated in Map 9.2). He called this his "global triad strategy." The key organizational strategy was to establish firms incorporated in the producing and consuming countries that would be jointly owned by LSI Logic and local investors. However, LSI Logic would hold a controlling interest in the firm. Although the operations in each country would be relatively independent of each other, they would still be linked by technology, money, and management. This would allow the synergy of interdependence to take place, but it would also permit local freedom in meeting the demands of the market.
Initial European Thrust Once Corrigan got operations under way, he began to look for more cash. The key was to find the right amount, at the right price, with the least number of problems. In February 1982, slightly more than a year after U.S. venture capital gave the company a start, LSI Logic turned to Europe in search of venture capital. It was found in a European investing community hungry for U.S. high-tech stock, so it was able to raise $10 million, mostly—but not exclusively—in Britain. That offering brought LSI Logic an average of $7
a share, compared with only $0.90 per share when it was set up only a year earlier.
At this point LSI Logic was growing rapidly. In May 1983 Corrigan took the firm public in the United States and raised over $162 million, an average now of $21 a share. That was a significant improvement over its European experience and demonstrated the size of the appetite in the United States for new high-tech companies.
The Japanese Strategy In spite of the success in Europe and in the United States, Corrigan still had not been able to complete the third part of his triad—Japan. However, Corrigan learned that Nomura Securities, the largest brokerage house in Japan (and subsequently the world), had purchased large blocks of LSI stock for its clients in Japan. Encouraged by this information, Corrigan traveled to Japan to meet with Nomura officials and try to decide what LSI Logic's next move should be. As a result of the visit and discussions, Corrigan decided that the time was right for starting operations in Japan. Following the strategy he had used elsewhere, Corrigan established a Japanese subsidiary of LSI Logic (called LSI Logic Corp. K.K.) in which the parent company owned 70 percent, and 25 local Japanese investors owned 30 percent. The investors were not small operations, however. Nippon Life Insurance Company, the third-largest insurance company in the world, just behind Prudential and Metropolitan Life, became a major shareholder in the new venture. The new investment was just right for LSI Logic. Not only did Corrigan now have access to the Japanese consumer market, but he also had access to the Japanese capital market. As a Japanese company, LSI Logic Corp. K.K. and its manufacturing affiliate, Nihon Semiconductor Inc., could now establish lines of credit with Japanese banks. In order to help LSI Logic penetrate the capital markets better and to develop more of a local image in Japan, Corrigan hired Keiske Awata, a senior executive of NEC Corp. who was working
outside of Japan at the time. Mr. Awata gave a Japanese image to LSI Logic in Japan and helped open the right doors to the financial world. LSI Logic was able to get a local line of credit at only 6 percent, compared with 9 percent in the United States at the time.
Second European Thrust Now that business in Japan was under way, Corrigan turned his attentions again to Europe. He was planning to set up a new European company and he needed to decide on its structure. The company could be set up as a branch of the U.S. parent that would use U.S. capital and be totally controlled and protected by the parent, or it could be set up as a European company. Corrigan decided to do the latter, so he used Morgan Stanley & Co., the large U.S.-based securities firm, to set up LSI Logic Ltd. The parent company retained an 82 percent stake in the new company, and the rest was sold to European investors in a private offering. One of the investors was the venture-capital arm of five West German banks. Corrigan was convinced that by setting up a European company, he was able to get more money by selling shares at a higher price than would have been possible otherwise and that LSI Logic Ltd. was better placed to service European customers than a branch of the parent company would have been.
Convertible Bonds In 1985 and again in 1987, Corrigan returned to European capital markets, but this time LSI floated a bond issue. The first issue of $23 million was put together by Swiss Bank Corp., one of the largest banks in the world. The second issue, a bond issue with securities convertible into common stock, was floated by Morgan Stanley and Prudential-Bache Capital Funding. There were two main attractions to the Eurobond market for LSI Logic: a decent price (lower interest rates than would have been offered in the United States), and a quicker time frame. Since LSI didn't have to
worry about all of the listing regulations of the Securities and Exchange Commission in the United States, it was able to get the offering together faster and out to the investing public.
Although significant amounts of funds were raised in foreign markets (over $200 million since 1982), there was no real exchange risk. LSI Logic operations worldwide were earning revenues that could be used to pay off the financial obligations. In addition, LSI Logic subsidiaries had access to local credit markets because they were organized as local corporations rather than branches of a foreign corporation.
In the late 1970s, Wilfred Corrigan, the British-born chairman and president of Fairchild Camera & Instrument Corp., sold Fairchild to Schlumberger Ltd. Approximately one year later, in November 1980, he started LSI Logic Corp., a manufacturer of custom-made microchips based in Malpitas, California. Although Mr. Corrigan's idea of custom-made microchips sounded unconventional at the time, he was able to use his
record at Fairchild to convince some U.S. venture capitalists in January 1981 to invest nearly $7 million in the new firm.
The company had only four employees at this point, but since Corrigan had solved two key issues—the nature of the product and the initial infusion of cash—there was a solid foundation for growth. Corrigan now had to decide how LSI Logic should service its customers worldwide, and how and where it would raise capital to keep expanding.
Global Strategy Mr. Corrigan learned from his experience at Fairchild that a producer of mi-
crochips had to think globally in terms of the location of production and the consumer. He quickly decided that in order to be successful, he needed to concentrate on being in three key geographic areas—Japan, the United States, and Europe (illustrated in Map 9.2). He called this his "global triad strategy." The key organizational strategy was to establish firms incorporated in the producing and consuming countries that would be jointly owned by LSI Logic and local investors. However, LSI Logic would hold a controlling interest in the firm. Although the operations in each country would be relatively independent of each other, they would still be linked by technology, money, and management. This would allow the synergy of interdependence to take place, but it would also permit local freedom in meeting the demands of the market.
Initial European Thrust Once Corrigan got operations under way, he began to look for more cash. The key was to find the right amount, at the right price, with the least number of problems. In February 1982, slightly more than a year after U.S. venture capital gave the company a start, LSI Logic turned to Europe in search of venture capital. It was found in a European investing community hungry for U.S. high-tech stock, so it was able to raise $10 million, mostly—but not exclusively—in Britain. That offering brought LSI Logic an average of $7
a share, compared with only $0.90 per share when it was set up only a year earlier.
At this point LSI Logic was growing rapidly. In May 1983 Corrigan took the firm public in the United States and raised over $162 million, an average now of $21 a share. That was a significant improvement over its European experience and demonstrated the size of the appetite in the United States for new high-tech companies.
The Japanese Strategy In spite of the success in Europe and in the United States, Corrigan still had not been able to complete the third part of his triad—Japan. However, Corrigan learned that Nomura Securities, the largest brokerage house in Japan (and subsequently the world), had purchased large blocks of LSI stock for its clients in Japan. Encouraged by this information, Corrigan traveled to Japan to meet with Nomura officials and try to decide what LSI Logic's next move should be. As a result of the visit and discussions, Corrigan decided that the time was right for starting operations in Japan. Following the strategy he had used elsewhere, Corrigan established a Japanese subsidiary of LSI Logic (called LSI Logic Corp. K.K.) in which the parent company owned 70 percent, and 25 local Japanese investors owned 30 percent. The investors were not small operations, however. Nippon Life Insurance Company, the third-largest insurance company in the world, just behind Prudential and Metropolitan Life, became a major shareholder in the new venture. The new investment was just right for LSI Logic. Not only did Corrigan now have access to the Japanese consumer market, but he also had access to the Japanese capital market. As a Japanese company, LSI Logic Corp. K.K. and its manufacturing affiliate, Nihon Semiconductor Inc., could now establish lines of credit with Japanese banks. In order to help LSI Logic penetrate the capital markets better and to develop more of a local image in Japan, Corrigan hired Keiske Awata, a senior executive of NEC Corp. who was working
outside of Japan at the time. Mr. Awata gave a Japanese image to LSI Logic in Japan and helped open the right doors to the financial world. LSI Logic was able to get a local line of credit at only 6 percent, compared with 9 percent in the United States at the time.
Second European Thrust Now that business in Japan was under way, Corrigan turned his attentions again to Europe. He was planning to set up a new European company and he needed to decide on its structure. The company could be set up as a branch of the U.S. parent that would use U.S. capital and be totally controlled and protected by the parent, or it could be set up as a European company. Corrigan decided to do the latter, so he used Morgan Stanley & Co., the large U.S.-based securities firm, to set up LSI Logic Ltd. The parent company retained an 82 percent stake in the new company, and the rest was sold to European investors in a private offering. One of the investors was the venture-capital arm of five West German banks. Corrigan was convinced that by setting up a European company, he was able to get more money by selling shares at a higher price than would have been possible otherwise and that LSI Logic Ltd. was better placed to service European customers than a branch of the parent company would have been.
Convertible Bonds In 1985 and again in 1987, Corrigan returned to European capital markets, but this time LSI floated a bond issue. The first issue of $23 million was put together by Swiss Bank Corp., one of the largest banks in the world. The second issue, a bond issue with securities convertible into common stock, was floated by Morgan Stanley and Prudential-Bache Capital Funding. There were two main attractions to the Eurobond market for LSI Logic: a decent price (lower interest rates than would have been offered in the United States), and a quicker time frame. Since LSI didn't have to
worry about all of the listing regulations of the Securities and Exchange Commission in the United States, it was able to get the offering together faster and out to the investing public.
Although significant amounts of funds were raised in foreign markets (over $200 million since 1982), there was no real exchange risk. LSI Logic operations worldwide were earning revenues that could be used to pay off the financial obligations. In addition, LSI Logic subsidiaries had access to local credit markets because they were organized as local corporations rather than branches of a foreign corporation.
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