Wi-Fi chipmakers of the World unite!
Choose me, Cisco, please, please, please
Conexant and GlobespanVirata are to merge in a $969m all-stock deal that takes them head-to-head with Broadcom in the broadband digital home and Wi-Fi markets. The merger comes less than four months after GlobespanVirata acquired WLAN chipmaker Intersil for
$365m and raises question marks over the future roadmap for the Wi-Fi range.
Intersil is clinging on to its position in the top two Wi-Fi chip suppliers, under aggressive threat from Broadcom itself and from Intel as well as its traditional rival, Atheros. Being part of a larger group should make its development roadmap better funded and increase its competitiveness with its larger challengers – the combined entity will have virtually the same revenues as Broadcom and a parallel technology footprint.
The deal values the merged company at $2.8bn with $1.2bn in annual revenues. Broadcom had revenues in its last fiscal of $1.08bn but its market value is far higher at $9.5bn. This is something Conexant and its new spouse will be keen to change, claiming their combined size and highly focused technology plans will make them more appealing to investors and customers.
However, there are three critical questions for the Intersil range. How will its parents deal with overlaps with Conexant’s own Wi-Fi products? How prominent a role – and therefore how big a slice of the funds - will it command in a company heavily focused on broadband media chips? And will the merger affect the all-important relationship with Intersil’s chief customer, Cisco?
Both the merging companies have been through serious refocusing in the past year, to target the booming broadband and narrowband home communications sectors, both wired and wireless. Conexant spun off three businesses that were not core to this business plan – wireless IC developer SkyWorks, networking IC company Mindspeed and foundry Jazz Semiconductor – while GlobespanVirata acquired Intersil in order to provide the “dream combination” of WLAN and DSL chipsets.
However, while Wi-Fi and DSL may be growth markets, they are also overcrowded and facing shake-out. The partners realised that, in this space, big would be beautiful. “There is a stronger long term revenue growth then if we operated as two standalone operations," said Dwight Decker, current CEO of Conexant, who becomes chairman of the combined company. (GlobespanVirata’s CEO Armando Geday, who formerly worked at Conexant, becomes group CEO. While the merged entity will take the Conexant name, it will be based in GlobespanVirata’s headquarters in New Jersey).
There is significant overlap between the two companies’ product lines. This is almost inevitable
in a merger designed to create a powerful monolith in existing markets, rather than to spread across new markets, but it will probably entail a painful integration process that could give Broadcom a short term advantage with OEMs, already wary of shake-out and instability in the chip markets. Both companies offer DSL chips for the customer premises equipment
sector and have an overlapping ADSL based in Asia.
In Wi-Fi, GlobespanVirata is the stronger through the Intersil acquisition, but Conexant also has 802.11b and 802.11g products and recently launched a baseband processor for the low power Wi-Fi market. Based on market share, it would seem probable that its 802.11b and 802.11g chips, though the former have been successful, will make way for Intersil’s offerings,
while Conexant will hang on to its most differentiated device, the CX85510 ‘g’ base-band/MAC chip.
This is exceptional because, in an effort to distinguish it in an overcrowded WLAN market, it
has been entirely reworked to support OFDM and quality of service, clearly with a view to the wireless digital media home – the chip can be directly connected to Conexant’s ADSL and cable modem chipsets. The device goes beyond almost all basebands on the market, with support for pre-standard 802.11i security, smart antennas and modem connection.
This clear focus on the home market may mitigate against some of Intersil’s products and former staff – though no decisions have yet been announced regarding plans for layoffs. It will certainly force the unit, which has been one of the most enterprise-focused of the Wi-Fi chipmakers, to shift its centre of gravity or risk becoming a sideline in the new structure. The
key interest will be in embedding Intersil’s WLAN technology into home networking and multimedia devices. This was foreshadowed last year when Conexant partnered with Intersil to develop a combined 802.11b/ADSL router chip.
However, this raises the critical issue of Cisco. The networking giant uses Intersil chips in its enterprise WLAN product range, which has about 75 per cent market share. However, its consumer-oriented Wi-Fi division, Linksys, which it acquired earlier this year and which has market lead in the home market, uses Broadcom silicon. The Linksys acquisition has led to persistent fears that Intersil, whose over-dependence on Cisco was seen as one reason why it was not strong enough to remain independent, would lose the Cisco deal to Broadcom.
These fears will be strengthened by the incorporation of Intersil into an organisation that is verwhelmingly consumer-focused. It will be less distinguishable from Broadcom, and therefore Cisco may see less reason to maintain two chip partnerships and could go for the
economies of scale of having a single supplier. Of course, Conexant would be in a stronger position than before to compete for that huge contract too, but the uncertain situation highlights the difficulty of operating in a market where one customer is so dominant.
The merger also highlights how the balance of funding and vendor interest is shifting to the digital home, leaving the enterprise, whose WLAN purchasing has been disappointing this year, somewhat sidelined. Most of the interesting work in chips optimised for corporate devices has been done in ‘souped-up Wi-Fi’ that operates over ranges and at speeds beyond those set by the 802.11x standards. Atheros has been very active in this arena, and stands to make great strides if its old enemy finds itself focusing on consumer markets.
An early indicator of the overall focus of the combined roadmap will be the way that Conexant and GlobespanVirata merge their personnel, and which kills they are keenest to retain in the 2,400-strong workforce. Decker said one approach would be to “pick a team and let the other go” but he added that this was not likely, and that the company wanted to use
greater resources to strengthen its position especially in engineering and R&D. However, given the overlaps, some redundancies seem almost inevitable.
And the merger isn’t all about overlap – Conexant brings cable modems to the party, plus its HomePlug powerline networking technology, which is being revamped with a planned new superfast version of the HomePlug AV industry standard. In return, its new partner brings a central office DSL chipset.
Under terms of the merger agreement, GlobespanVirata shareholders will receive 1.198 shares of Conexant common stock for each outstanding share of GlobespanVirata stock.
Based on Friday's close, Conexant shareholders will own 62.75% and GlobespanVirata shareholders will own 37.25% of the combined company's stock. Based on Conexant's Friday closing of $5.84 a share, GlobespanVirata is valued at about $7 a share, a 14% premium to its Friday closing price.
Both companies reported quarterly results last Thursday. For its fourth quarter, Conexant swung to a profit of $37.2 million, on revenue up 24% to $164.7 million. GlobespanVirata posted a slightly wider net loss of $31.3 million for its third quarter but its quarterly revenue doubled to $98.8 million.
The WLAN chipset market has become crowded on the back of the Wi-Fi boom, and now numbers a dozen serious suppliers. Intersil is the leader, with Broadcom poised to take second place by the end of this year, overtaking Atheros. Between them, these two will control about half of the market. The other majors are Agere, Atmel, Marvell, RF Micro and Texas Instruments. Now Intel and AMD are throwing their hats in the ring, in Intel’s case with potentially highly disruptive effect. Also, in the ‘b’ sector, we see Taiwanese manufacturers such as Acer and SiS coming in with commodity products for an increasingly price-depressed
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