Chip startup Velio Communications Inc. has finally been snapped up, by ASIC provider LSI Logic Corp. (NYSE: LSI) in a $20 million deal announced today (see LSI Logic Acquires Velio).

The deal is expected to close within a month. A spokesman says LSI hasn't determined how many of Velio's 26 employees will join the company.

Velio has been on the block for some time, with Applied Micro Circuits Corp. (AMCC) (Nasdaq: AMCC) rumored to be interested in October. Rambus Inc. (Nasdaq: RMBS) bought the serial-link portion of Velio in December but left the company's other technology behind (see Velio Dealio Realio? and Rambus Buys Velio's Serial Biz).

Velio's lineup includes a TDM switch fabric and high-speed serializer-deserializer (SerDes) offerings, as well as some interconnect technology for storage area networks (SANs).

A longtime builder of ASICs, LSI is adept at integrating electronic circuits into complex devices often called "systems on a chip." While Velio's elements could fit in that plan, LSI is more interested in selling Velio's chips on their own. "This expands our standard product offerings for the enterprise," an LSI spokesman says.

Beyond that, one source familiar with Velio suggests the main interest is from another angle: Velio once built a custom chip for Cisco Systems Inc. (Nasdaq: CSCO), and LSI would like to snuggle up closer to the routing giant.

"For LSI to get on the preferred list at Cisco as an ASIC supplier, it makes sense," says the source, who requested anonymity. And LSI's spokesman admits that Velio's past work with Cisco "certainly has not escaped our attention."

But as mentioned above, LSI doesn't plan to use Velio as an ASIC contributor. Moreover, analysts believe LSI already has a comfortable standing within Cisco; one, who requested anonymity, ranks LSI fourth among Cisco's suppliers, after IBM Corp. (NYSE: IBM), STMicroelectronics NV (NYSE: STM), and Texas Instruments Inc. (NYSE: TXN).

"It is not uncommon for chip companies to buy into a customer base with a strategic acquisition," says Clark Fuhs, an analyst with Fulcrum Global Partners. But he's not certain LSI needs that much of a boost: "I thought they were engaged with Cisco on a number of projects."

Lately, LSI has become best known for consumer products, such as the Sony PS2, and storage, where LSI has a spinoff pending (see LSI's Storage Sub Plans IPO and Window of Opportunity). Communications is still an important market for the company, though. It represented 19 percent of its sales last quarter, about $88 million, and grew 12 percent for LSI between September and December 2003.

— Craig Matsumoto, Senior Editor, Light Reading