Earlier this month, Qualcomm and LSI Logic went on a nano-based shopping spree. LSI spent $4 billion and snapped up Agere Systems, a company that shared DNA with AT&T, Lucent Technologies and Bell Labs. Qualcomm, which is well known for its CDMA and W-CDMA technologies, snapped up Airgo and a division of RF Micro Devices.

With chip sector growth falling into single digits, industry insiders are predicting frenzied deal making, whether it is through mergers and acquisitions. Many are betting on leveraged buyouts. EE Times, the one true bible of the chip business says that companies that specialize in analog chips or FPGA chips could be taking a private road out of the public markets.

Who could go private? EET says Xilinx, Altera, Maxim, Linear and National Semiconductor are all go-private candidates. Philips Electronics’ chip division has already gone this route, through a $10 billion-plus KKR/Silver Lake deal back in August. It is amazing how quickly the fortunes of these companies have turned. During the go-go 1990s, analog and FPGA chipmakers were the darlings of the stock markets, soaring to new highs by the day.

The chip sector has certainly changed – from one dominated by personal computers and telecom gear to one that is increasingly reliant on the consumer electronics and mobile phones. In a recent research report, Gartner Inc. said that chip revenues for 2006 totaled about $261 billion, up 11% from global chip sales in 2005.

While 11 percent growth sounds great, in reality it is only a handful of companies that are doing well – especially those who are in the memory chip or wireless semiconductor business.

“Outside of DRAM, wireless semiconductor sales once again drove strong performance in the industry,” said Jeremey Donovan, research director at Gartner, in a press release. Intel, the world leader in chip revenues, saw its sales decline by almost 9.5 percent and market share drop by about 2.7 percent.

The telecom industry, once a voracious consumer of specialist chips and high-priced FPGAs has itself fallen on hard times, and has seen a consolidation of its own. The end customers, aka service providers who bought chip-laden gear have merged and become more powerful, squeezing the telecom gear makers, who in turn have been passing on the pressure to their suppliers.

It is no surprise that everyone is looking at the consumer electronics market as the panacea for all that ails the chip industry. The shift has become pronounced in recent years as demand for application-specific chips has shot up. A case in point: PortalPlayer, which benefited from the growing popularity of Apple’s iPod music player.

While digital cameras, LCD televisions, and music players are high-volume products, they are also very price sensitive, and leave little room for failure as far as chip makers are concerned. Again, a case in point is PortalPlayer, which got designed out of one generation of Apple iPod devices and was punished by the stock markets with the abandon of a dominatrix.

But that is going to change as well. More on that in part two of this three-part series, to be published on later this week.