Intel Hands Off to Cortina

Like a sports team cutting an aging superstar, Intel Corp. (Nasdaq: INTC) has made the long-awaited move to shed some of its communications business.

Privately held Cortina Systems Inc. , which has dabbled in various types of Ethernet and Sonet chips, purchased part of the Intel optical networking business for $115 million in a deal that closed Friday, Sept. 8, the companies announced this afternoon. (See Cortina Buys Intel Biz.)

Cortina will pick up Intel facilities in Folsom, Calif.; Raleigh, N.C.; and Asia. About 120 employees are affected by the deal, and "Cortina has extended offers to a significant number of them," an Intel spokesman says.

The acquisition is an ambitious step for Cortina, which had only 85 employees last year. To supplement its new lifestyle, the startup is getting a whopping $132 million, led by Canaan Partners , new investor Institutional Venture Partners , and Morgenthaler , and supplemented by Alloy Ventures , Bridgescale Partners, DCM - Doll Capital Management , Sofinnova Ventures Inc. , and Cortina's previous venture investors.

Significantly absent from the deal is Intel's network processor business. While this area would be a departure for Cortina, it would have given the startup a broader set of products for linecards. Intel's goal in amassing its communications business had been to supply all the major components of a linecard.

Likewise, Intel will continue to sell 10-Gbit/s transceiver modules, the fruits of its LightLogic acquisition in 2001. That's no surprise, as Cortina's brief history has been all about chips, not optics; moreover, Intel reportedly has a steady customer for the modules in Cisco Systems Inc. (Nasdaq: CSCO).

"We continue to be committed to the communications infrastructure space," the Intel spokesman says, citing increased acceptance among OEMs of off-the-shelf chips and standard structures such as the Advanced Telecom Computing Architecture (AdvancedTCA) .

Like everybody else in tech, Intel was captivated by the promise behind the dotcom bubble. Then-CEO Craig Barrett pegged communications as the future of Intel, kicking off a series of acquisitions such as Dialogic, which was recently sold off to Eicon Networks Corp. In 2000, the effort began to include optical networking. (See Intel Dumps Dialogic and Intel's 10-Gig Shopping Spree.)

Intel was hardly alone. Traditional telecom-chip companies, including Applied Micro Circuits Corp. (Nasdaq: AMCC), PMC-Sierra Inc. (Nasdaq: PMCS), and Vitesse Semiconductor Corp. (Nasdaq: VTSS), were buying big -- as were less obvious candidates like Broadcom Corp. (Nasdaq: BRCM). (See Broadcom Buys Its Way In.)

Speculation that Intel would sell its communications division ignited in April, when CEO Paul Otellini declared a 90-day soul-searching period to trim down Intel's ranks. Analysts have said, however, that products like network processors could still have a place in Intel's future. (See Will Intel Trash Telecom?)

Other Intel pieces trimmed include Dialogic and the XScale processor line, the latter being part of a $600 million sale of handset chips to Marvell Technology Group Ltd. (Nasdaq: MRVL). (See Marvell Takes a Bit of Intel.)

As for Cortina, its ambitions were beginning to show already. The company started out doing Resilient Packet Ring Technology chips but has expanded its reach into other types of Ethernet and Sonet/SDH chips. Cortina even picked up a traffic manager chip -- a cousin to network processors -- by acquiring Azanda last year. (See Cortina Releases Arsenal and Azanda Lands a Buyer.)

Separately, Cortina is working with Cisco on a 40-Gbit/s interface called Interlaken. (See Cortina, Cisco Team Up and Trio Builds Interface Chip.)

Intel shares climbed after the announcement but still finished at a loss, trading down 5 cents (0.3%) at $19.39 at press time.

— Craig Matsumoto, Senior Editor, Light Reading