PMC Preps PON Plans
The move, announced late yesterday, would put PMC-Sierra into the hot fiber-to-the-premises (FTTP) market with Passave's EPON and GPON controller chips. The deal could also trigger a spurt of consolidation, as privately held BroadLight Inc. and Teknovus Inc. could likewise be considered takeover targets.
Expected to close this month, the all-stock deal would preempt Passave's planned IPO, initially estimated at $90 million. (See PMC to Acquire Passave and Profitable Passave Pushes for IPO.) Nearly all of Passave's 150 employees would join PMC.
What makes Passave stand out is its quick success in Japan's EPON market, thanks to design wins with three NTT Communications Corp. (NYSE: NTT) suppliers: Mitsubishi Electric & Electronics USA Inc. , Sumitomo Electric Industries Ltd. , and UTStarcom Inc. (Nasdaq: UTSI).
That's led to Passave revenues of $43.2 million for the calendar year 2005, compared with $21.2 million for 2004, as PMC chief financial officer Alan Krock told analysts on a conference call yesterday. Passave is profitable, with gross margins expected to be between 50 and 60 percent for this year, Krock added.
In terms of an acquisition, Passave could be considered the most attractive of the PON-chip startups. Teknovus eschews GPON despite the U.S. RBOCs' overt plans to use the technology. And neither BroadLight nor Teknovus appears to have a revenue stream as well established as Passave's. (See Chips Draw PON Plans and GPON RFP Weighs In.)
"With Passave, you had somebody that was generating revenue, that was a profitable company, and was the leader in a segment that was growing rapidly," says Jag Bolaria, an analyst with The Linley Group . "It's a pretty safe bet to make."
What really prompted PMC to make its offer was the possibility of developing new products, combining PON technology with some of the residential-gateway products PMC has planned for later this year, PMC chief executive Bob Bailey tells Light Reading. "We didn't really pursue anybody else," he says.
Aside from getting presumably more money than the IPO would raise, Passave would gain the muscle of an established company, which could be important as PON competition mounts from public chip firms such as Centillium Communications Inc. , Conexant Systems Inc. (Nasdaq: CNXT), and Freescale Semiconductor Inc. . "We had an opportunity to reach a wider market," says Ariel Maislos, Passave's president.
As for other merger possibilities, Teknovus might be in a decent position if it can become a second source for NTT -- something NTT seems to be in favor of, according to Linley's Bolaria.
"You can imagine somebody like an Applied Micro Circuits Corp. (Nasdaq: AMCC) -- which has some GPON activity going on -- or a Conexant Systems Inc. (Nasdaq: CNXT) could snap up Teknovus," Bolaria says. (See AMCC Adds GPON and Conexant Intros PON Chips.)
Passave would be PMC's second recent acquisition, after buying a chunk of the former Agilent semiconductor business. (See PMC Bites a Bit of Agilent.) But on yesterday's conference call, Bailey told analysts PMC doesn't need shopaholic counseling. "We're not losing our discipline. We're going to continue to be extremely selective," he said.
Those words might soothe those who remember the bubble days, when PMC acquired its way into the then-hot packet-processing sector, only to back down as the market crashed. (See PMC-Sierra Pulls Packet Silicon.)
Everything sounds fine and dandy, but there's just one thing. UTStarcom recently sued Passave, demanding $30 million in recompense for allegedly having to replace faulty Passave chips. (See UTStarcom Sues Passave.) Bailey shrugged off the matter during yesterday's conference call. "I know the chairman personally, and I am very confident we're going to put this behind us one way or another, so I am not worried about that at all," he said. "There's no profit in fighting with your customer."
In after-hours trading yesterday, PMC shares were up 9 cents (0.7%) at $12.35.
— Craig Matsumoto, Senior Editor, Light Reading