August 28, 2000
The stakes are getting higher as the consolidation of communication chip vendors continues. Applied Micro Circuits Corp. (Nasdaq: AMCC) announced Sunday that it would be acquiring MMC Networks Inc. (Nasdaq: MMCN) in a deal worth $4.5 billion, the second highest valued merger in the semiconductor industry after Texas Instruments Inc.'s $6.1-billion deal to acquire Burr-Brown Corp., which closed last week.
This is only the latest acquisition in a series, as optical chip vendors come together with IP routing and switching chip vendors. In the last six months, competitors such as Broadcom Corp. (Nasdaq: BRCM-news), PMC Sierra Inc. (Nasdaq: PMCS), Vitesse Semiconductor Corp. (Nasdaq: VTSS), and others have also been acquiring other chip vendors to fill out their product lines (see Broadcom Buys Its Way In). PMC Sierra closed its $2.4-billion deal to buy network processor maker Quantum Effect just last week.
What’s driving the consolidation? As system vendors incorporate more routing and switching functionality into their products, they are looking to chip vendors to supply them with the whole gamut of communications components. Using one supplier can help them reduce their time to market, cut developmental costs, and increase their product life cycle.
“Everyone is moving in this direction,” says Andrew Schmitt, product marketing manager for Vitesse. “Nortel or Lucent don’t want a hodge-podge of different products from different vendors. They want one-stop shopping.”
Many in the industry are calling the Applied Micro and MCC merger a perfect marriage of complementary technologies. Applied Micro is one of the leading suppliers of chips used to make fiber-optic communications equipment. Its chips handle the optical-to-electrical conversions necessary in many optical networking products. MMC makes network processors used to route enterprise network traffic to the outside world. These chips are used in such products as enterprise-level IP routers from companies like Cisco Systems Inc. (Nasdaq: CSCO).
MMC is not the first packet-processing chip vendor that Applied Micro has bought. In April the company bought Yuni Networks Inc., a developer of terabit switch fabric processors, for $241 million. The two technologies will complement each other, says the vendor. But it’s clear the cost for network processing technology has gone up considerably in the last few months.
Since the rash of acquisitions began last year, Applied Micro’s choices for acquisitions had been limited. Considering that the other two choices for similar technology are Intel Corp. and IBM Corp., it’s no surprise that Applied Micro was willing to cough up $4.5 billion, because it surely wasn’t going to be able to buy either of the other two choices.
MMC shares shot up 41 percent in trading today, while Applied Micro slipped 4 3/4 to 182 11/16. The terms of the deal call for Applied Micro to issue 0.619 of a share for each share of MMC.
-- Marguerite Reardon, senior editor, Light Reading, http://www.lightreading.com
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