Agere Systems Inc. (NYSE: AGR.A) has acquired Dublin-based Massana, a maker of Gigabit Ethernet physical layer (PHY) chips for use on copper networks, for about $26.2 million worth of its common stock (see Agere Buys Ireland's Massana).

Because the cycle for electronic integrated circuits (ICs) like Massana's is so long, Agere doesn't expect to see revenues from its new acquisition show up in any meaningful way until the second half of 2004. Even then, costs related to the acquisition could take $0.01 to $0.02 off full-year 2004 earnings, the company says.

Still, Massana is ready with a live product and reference designs, and Agere says the acquisition will help it tap "a major opportunity" in Gigabit-Ethernet-over-copper PHYs. Makers of enterprise adapter cards, switches, routers, and networked storage gear, sources say, are looking to serve new demand for greater internal network speeds, as companies replace private lines with emerging Ethernet services (see Gig-E Testers Wear Two Hats).

Massana, founded in 1996 and funded with about $17.5 million from a range of sources, including the venture capital division of Dresdner Kleinwort Wasserstein and ACT Venture Capital, has had single- and four-port PHYs for sale since February 2002. The startup touts high performance at low power as its key differentiator.

Agere will likely use the low-power pitch to compete against a small cadre of GigE PHY vendors, which will prove a major challenge to market entry. The list of current players includes Broadcom Corp. (Nasdaq: BRCM), Intel Corp. (Nasdaq: INTC), and Marvell Technology Group Ltd. (Nasdaq: MRVL), as well as private companies such as Cicada Semiconductor Inc. and Mysticom Ltd.

Besides stiff competition, Agere faces the usual integration challenges. About 45 Massana employees are joining Agere and will stay in the Irish company's headquarters in Dublin, its U.S. office in Santa Clara, Calif., and its Madrid development facility. (Agere says it doesn't know what's become of a Taiwan office Massana touted in press releases during the boom.) CEO and founder Paul Costigan is leaving, but COO Brendan O'Flaherty and CTO and VP of strategic marketing Brian Murray will stay on.

Analysts applaud the move -- so far. "I think it establishes a position for Agere. It's a technology purchase, and Agere is good at packaging its intellectual property," says John Harmon of Needham & Co.

— Mary Jander, Senior Editor, Light Reading