Case Study

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 Milpitas, California. Although Corrigan’s idea of manufacturing custom-
made microchips sounded unconventional at the time, he was able to use his track record at
Fairchild to convince some U. S. venture capitalists to invest nearly $7 million in the new
company in January 1981.

The company began with only four employees, but because Corrigan had solved two key
issues – the nature of the product and the initial infusion of cash – there was a solid
foundation for growth. He next had to decide how LSI Logic should service its customers
world-wide and how and where it would raise capital to keep expanding.

From his experience at Fairchild, Corrigan knew that a producer of microchips 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 three key geographic areas – Asia, Europe
and the United States. He called this his “global triad strategy”, defining the triad more
specifically as Japan, Western Europe, and North America. His key organisational strategy
was to incorporate companies in the producing and consuming countries that would be jointly
owned by LSI Logic and local investors, with LSI Logic holding the controlling interest.
Although the operations in each country would be relatively independent of each other, they
would be linked by technology, money and management. This set-up would encourage the
synergy of interdependence while permitting local freedom in meeting the demands of the
market.

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,
LSI Logic turned to Europe in search of venture capital, which was found in a European
investing community hungry for U.S. high-tech stock. The company subsequently was able
to raise $10 million, mostly – but not exclusively – in the United Kingdom. At this point, LSI
Logic was growing rapidly. In May 1983, Corrigan took the company public in the United
States and raised over $162 million, an average of $21 a share. That demonstrated the size of
the appetite in the United States for sock in new high-tech companies.

Despite the European and U.S. success, Corrigan still had not been able to raise capital in
Japan. However, he learned that the Japanese brokerage house Nomura Securities 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 to try to decide what LSI
Logic’s next move should be. As a result of the visit, Corrigan decided the time was right for
starting operations in Japan. Following the strategy he had used elsewhere, he established a
Japanese subsidiary of LSI Logic (called LSI Logic Corp. K.K.), of which the parent
company owned 70 percent and twenty-five Japanese investors together owned 30 percent.
The new investment was just right for LSI Logic it gained access not only to the Japanese
consumer market but also to the Japanese capital market. As a Japanese company, LSI Logic
Corp. K.K. and its manufacturing affiliate, Nihon Semiconductor Inc., could establish lines of
credit with Japanese banks and did so at only 6 percent, compared with 9 percent in the
United States at the time.
When business in Japan was under way, Corrigan once more turned his attentions to Europe.
He planned to set up a new European company and needed to decide on its structure. The
company could be set up as a European company, or it 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.
Corrigan decided on the former and consequently used Morgan Stanley & Co., the large U.S.
based securities firm, to set up LSI Logic Ltd. Corrigan was convinced that by setting up a
European company, he would be able to get more money by selling shares at a higher price
than would be possible otherwise and that LSI Logic Ltd would be better placed to serve
European customers than would a branch of the parent company. The parent company
retained an 82 percent ownership share in the new company and sold the rest in a private
offering to European investors one of which was the venture-capital arm of five German
banks.

In 1985 and again in 1987, Corrigan returned to European capital markets; both times LSI
Logic floated a bond issue. The first issue of $23 million was put together by Swiss Bank
Corp., one of the world’s largest banks. The second, a bond issue with securities convertible
into common stock, was floated by Morgan Stanley and Prudential-Bache Capital Funding.
LSI Logic was attracted to the Eurobond market for two main reasons: a decent price (lower
interest rates than were being offered in the United States), and a quicker time frame.
Because the company was issuing the bonds in Europe and so idn’t have to worry about the
more onerous regulations of the SEC, it was able to get the offering together and out to the
investing public faster.

By 1995, LSI was generating $1.27 billion in revenues from sales worldwide. It is considered
the world leader in the design, production, and sale of advanced custom semiconductors. LSI
also employed about 4,000 workers worldwide in 1995, with manufacturing facilities in the
United States Japan and the Far East. Management and control of LSI’s manufacturing
operations are performed by the company’s Hong Kong affiliate. The predicted increase in
chip sales to Asia between now and the end of the decade prompted LSI to establish a
regional headquarters in Singapore in 1996.

Because of its worldwide operations, LSI is heavily exposed to exchange rate changes. A
substantial portion of the cost of LSI’s manufacturing operations is denominated in Japanese
Yen. In addition, LSI purchases a significant amount of its raw materials and components
from foreign suppliers. International sales are usually denominated in the local currency
instead of U.S. dollars, which creates more foreign exchange risk for the company.

Analyse the case study identifying issues related to money matters.