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Why did AQR Capital Management increase its position in LSI?

Assessing AQR Capital Management's fourth quarter positions (Part 7 of 7)

(Continued from Part 6)

AQR Capital and LSI

AQR Capital initiated new positions in Vodafone Group plc (VOD), Gaming and Leisure Properties (GLPI), and Allegion plc (ALLE). Positions were increased in Facebook, Inc. (FB), Omnicom Group (OMC), and LSI Corporation (LSI). AQR added to its position in LSI Corporation (LSI), which currently accounts for 0.49% of the fund’s 4Q portfolio, up from 0.19% in 3Q 2013.

LSI designs, develops, and markets complex, high-performance storage and networking semiconductors. It offers a broad portfolio of capabilities including custom and standard product integrated circuits that are used in hard disk drives, solid state drives, high-speed communications systems, computer servers, storage systems and personal computers.

In December 2013, Avago Technologies (AVGO) announced the acquisition of LSI for $11.15 per share in an all-cash transaction valued at $6.6 billion. Avago is a leading designer, developer, and global supplier of a broad range of analog semiconductor devices with a focus on III-V based products. III-V semiconductor materials have higher electrical conductivity than silicon, and so, they tend to have better performance characteristics in radio frequency, or RF, and optoelectronic applications. The acquisition creates a highly diversified semiconductor market leader with approximately $5 billion in annual revenues by adding enterprise storage to Avago’s existing wired infrastructure, wireless, and industrial businesses.

The transaction is expected to close in the first half of 2014. Avago anticipates achieving annual cost savings at a run rate of $200 million by the end of the fiscal year ending November 1, 2015, the first full fiscal year after closing. With the acquisition, semiconductor company Avago will expand into networking and storage chips. The management said the acquisition positions Avago as a leader in the enterprise storage market and expands its offerings and capabilities in wired infrastructure, particularly system-level expertise.

LSI hedge
LSI hedge

LSI’s fourth quarter results beat analyst estimates. Fourth quarter 2013 revenues were $605 million, compared to $600 million in the fourth quarter of 2012 and $607 million in the third quarter of 2013. GAAP net income was $45 million, or $0.08 per diluted share, compared to fourth quarter 2012 GAAP net income of $23 million, or $0.04 per diluted share. The company’s PCIe flash-based microproducts grew 55% year-over-year, and networking investment area products grew 10% year-over-year. LSI is ranked second as a provider of merchant PCIe flash solutions and uniquely positioned as the supplier with the industry’s broadest PCIe flash portfolio. LSI’s storage semiconductor products represented approximately 77.9%, while networking semiconductor products represented 16.8% of total revenues in 2013. Among customers, Seagate Technology (STX) accounted for approximately 25% of LSI’s total revenues in 2013.

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