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Broadcom Buys Its Way In

Light Reading
News Analysis
Light Reading
8/14/2000

Broadcom Corp. (Nasdaq: BRCM) today stepped up its push into optical networking by announcing plans to buy NewPort Communications Inc., a privately held startup specializing in integrated circuits (ICs), for roughly $1.24 billion.

The move could give Broadcom a leg up on delivering Sonet and SDH (synchronous digital hierarchy) components, which have been missing from its product portfolio. It also could help the component vendor position itself more effectively in the emerging 10-Gbit/s Ethernet market against the likes of Applied Micro Circuits Corp. (Nasdaq: AMCC), Intel Corp. (Nasdaq: INTC), and Vitesse Semiconductor Corp. (Nasdaq: VTSS).

Broadcom plans to issue 5.5 million shares of its Class A common stock to buy NewPort within 60 days -- a transaction that would total about $1.24 billion, based on Broadcom's Friday share price of $225.0625. Spokespeople for Broadcom say that personnel from NewPort, which is right across the street from Broadcom, won't be relocated or reduced.

Wall Street greeted the announcement favorably: Broadcom's shares had risen $10.31 to trade at $235.38 by late afternoon.

While Broadcom has excelled in the market for gigabit Ethernet, xDSL, cable modem, and home networking components (as evidenced by its 105 percent year-to-year quarterly growth, announced last month -- see Broadcom 2Q Revenues Up 105% Over '99), the component maker had never shipped a broadband telecom chip. Still, this past May, it announced sampling of "the world's first single-chip 10-gigabit per second Ethernet CMOS transceiver," and subsequently was taken to task by a range of industry sources, including Light Reading (see A Tall Tale of 10-Gig ).

For one thing, the new chip wasn't 10-Gbit/s Ethernet, since those standards are far from finished. For another, the chip wasn't 10-Gbit/s in the strict sense. Instead, it is based on a design that runs four 3.125-Gbit/s channels in parallel. The four-channel PHY (physical interface) requires four separate lasers to link to an optical network, making it chiefly suitable for coarse wavelength-division multiplexing (CWDM) applications.

NewPort, on the other hand, seems to supply the pieces missing from Broadcom's WAN story. It does have a full-fledged serial OC192 (10 Gbit/s) interface in CMOS (complementary metal-oxide semiconductor) that works with a single laser, although it also can't claim to support 10-Gbit/s Ethernet ahead of specs. While these OC192 chips are still not shipping officially, NewPort president Armond Hairapetian says JDS Uniphase Corp. (Nasdaq:JDSU; TSE:JDU) plans to buy them for use in optical modules for OEM to switch vendors. He says that the Broadcom acquisition won't affect the deal with JDSU, because the OC192 chips don't compete with anything JDSU currently has.

NewPort, meantime, is shipping a series of OC48 (2.5 Gbit/s) chips that Hairapetian says went into the making of boxes from Cerent and Monterey Networks (both now owned by Cisco Systems Inc. -- Nasdaq: CSCS) as well as WDM gear from Lucent Technologies Inc. (NYSE: LU).

According to Hairapetian, NewPort's use of CMOS technology is a boon compared to alternative fabrication methods like gallium arsenide. "CMOS takes half the power and has more integration capabilities than [other methods]," he says. "Also, with CMOS we can take advantage of a range of existing manufacturing facilities for silicon."

Some sources claim, however, that CMOS can't yet deliver the performance required of high-end Sonet applications, due to its simpler structure. "CMOS isn't there yet for speeds above 2 Gbit/s," said a spokesperson for AMCC in a separate, unrelated interview earlier this summer. AMCC mixes CMOS with germanium in its Sonet chips at present, although it plans to eventually migrate chips to all-CMOS.

If Broadcom can overcome this and other resistance arguments (and if it can overcome its reputation for hyperbolizing its market strategies), it could finally start making a dent in the telecom market. And, for its part, NewPort could gain much-needed manufacturing resources, enabling it to get out of the startup mode and into the mainstream of supplying Sonet chips.

The acquisition is the fourth in a series for Broadcom since July: The company acquired Innovent Systems Inc., which makes wireless CMOS ICs, on July 19 for 2.3 million shares (about $500 million); Altima Communications Inc., a maker of networking ICs for small and medium-sized businesses, on July 31 in a transaction valued at about $533 million; and Silicon Spice Inc., a DSP vendor, on August 7 for about $1 billion.

-- by Mary Jander, senior editor, Light Reading http://www.lightreading.com

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