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Comms chips

NetLogic Seeks Search

7:40 AM -- Integrated Device Technology Inc. (IDT) (Nasdaq: IDTI) found a graceful way to get out of the network search engine business: Sell it to NetLogic Inc. for what appears to be a rich sum of $90 million. (See NetLogic Buys IDT Assets.)

That's more than two times revenues, based on the $10 million-per-quarter estimate IDT officials gave during yesterday's earnings call. Pretty decent sum for a recession, and for a product line with limited growth potential (more on that in a second).

If the deal goes through, it leaves NetLogic with only one substantial search-engine chip competitor: memory-chip vendor Renesas Technology Corp.

By "search engine chips," we mean networking chips that include a special type of memory: the ternary content-addressible memory (TCAM). Back in the late 90s, Cisco Systems Inc. (Nasdaq: CSCO) was hot on the idea of TCAMs for its routers, and chip companies were only too happy to oblige. By now, those competitors hve fallen by the wayside -- or gotten bought by NetLogic. (See NetLogic Makes Its Move.)

And IDT had stopped putting money into search engines. They're a niche type of chip, and my perception has always been that the business depends heavily on keeping Cisco happy. Network search engines don't have the widespread potential of, say, the communications interface parts sold by Tundra Semiconductor Corp. (Toronto: TUN). And guess what: Yesterday IDT said it plans to buy Tundra for CDN$120.8 million (US$101.3 million).



Ironically, IDT had managed to find new customers for search engines -- that's what NetLogic officials said on their own earnings call yesterday. So the deal gives NetLogic not only an increased market share within Cisco (about 50/50 against Renesas) but a wider swath of search-engine customers.

NetLogic might have really wanted IDT's business for the patents, though -- 75 of them, dating back to the early TCAM days.

There's still one question about the deal: Where is NetLogic getting the money for it? NetLogic has only $88.9 million in cash and short-term investments. The deal gives NetLogic the option to put $30 million of the price tag on a two-year promissory note. NetLogic is counting on a "strong and consistent" cashflow to pay that off.

And a tip o' the Valley Wonk propeller beanie to Seeking Alpha for transcripts of the IDT and NetLogic calls. — Craig Matsumoto, West Coast Editor, Light Reading

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