NetLogic Joins Processor Race
The deal, announced today, would have NetLogic paying a combination of cash and stock -- between 5.1 million and 6.5 million shares -- for a purchase price of around $175 million, as of this morning. (See NetLogic to Acquire RMI.)
NetLogic's stock was trading up $3.73, (up 11.4%) at $36.45 each, midday, putting the company's market capitalization at around $800 million.
NetLogic's business so far has been mostly in what it calls knowledge-based processors, which combine a microprocessor with a ternary CAM (TCAM), a type of memory that's useful for storing tables of data. Cisco Systems Inc. (Nasdaq: CSCO) was an early TCAM supporter, as the chips come in handy for large routing tables.
In other words, NetLogic built coprocessors that sit on a line card next to a network processor. And coprocessors have a tendency to get sucked into bigger processors, says Linley Gwennap, principal analyst with The Linley Group .
"We knew NetLogic was looking at a long-term play, and they realized their technology was not going to be long-term suitable unless they had a processor to attach it to," Gwennap says. RMI -- formerly Raza Microelectronics Inc. -- makes general-purpose processors that can be used for the control plane in a router or switch (as opposed to the data plane, where processors crack into packets and manipulate data headers as necessary).
Competing with Cavium Inc. (Nasdaq: CAVM) and Freescale Semiconductor Inc. , RMI can apply its chips to all manner of other applications, a world vaguely referred to as embedded computing. (See RMI, Cavium Compare at the Core .) That includes security and storage appliances and other types of networking gear -- areas that haven't been big customer sources for NetLogic so far.
What RMI gets out of the deal is the stability of public-company backing.
"Customers have become very conservative in this economic environment and they're very hesitant to commit these five- to seven-year programs to a private company," NetLogic CEO Ron Jankov said on this morning's conference call with investors. "What's been holding [RMI] back the last 12 months has been being a private company."
"RMI's been trying to figure out an exit strategy for a couple of years now," Gwennap says. "An IPO's not looking good, and as far as I know, they're still not profitable."
Still, RMI claims it's on the rise, with revenues from its XLR and XLS product lines growing in each of the last 10 quarters, according to Jankov. RMI's total revenues for 2008 were around $79 million, compared with NetLogic's $139.9 million.
"In a normal environment, they would have had a blowout IPO," Jankov said.
The deal would double NetLogic's employee count, to around 500. RMI chief executive Behrooz Abdi, a veteran of Motorola Inc. (NYSE: MOT) and Qualcomm Inc. (Nasdaq: QCOM), would remain with NetLogic as an executive vice president.
Given that the companies are nearly equals in size, the going could get tricky. "It's certainly going to be a challenge for NetLogic to take on a merger of this magnitude," Gwennap says.
There's also the question of what NetLogic does with RMI's Alchemy line of processors, intended for consumer electronics. (See RMI Brews Alchemy.) RMI's XLR line of processors "line up pretty well with what NetLogic's doing, but Alchemy does not," Gwennap says.
— Craig Matsumoto, West Coast Editor, Light Reading