Broadcom's on a Buying Spree

In its latest attempt to play in the carrier market, Broadcom Corp. (Nasdaq: BRCM) announced this morning that it plans to purchase SiByte Inc., a privately held maker of network processor chips.

Network processors are chips specially designed to handle the functions of networking equipment, such as packet filtering. They are becoming widely used as a means of increasing the efficiency of telecom gear (see Network Processors Proliferate). With the purchase of SiByte, Broadcom is taking advantage of one of the first MIPS-based network processors on the market.

Broadcom plans to issue a total of 9.3 million shares to buy SiByte: About 5.6 million shares will be issued when the transaction closes, within 60 days; another 3.7 million shares will be reserved for issuance to stockholders of SiByte "upon satisfaction of certain [unspecified] performance goals"; and about 1.8 million more shares will be set aside for issuance to customers "upon the exercise of outstanding performance-based warrants of SiByte... exercisable upon satisfaction of certain customer purchase requirements."

It all adds up to a purchase price of about $2 billion. But analysts say that figure will probably shrink to about $1.3 billion once all aspects of the transaction are complete.

Broadcom's convinced it's got a good deal. "This is the most strategic acquisition we've done in the history of the company," said Broadcom president and CEO Henry T. Nicholas III in a conference call. The buy, he says, is a step forward in Broadcom's campaign to buy what it needs to strengthen its WAN play (see Broadcom Buys Its Way In). Related acquisitions include the purchase of NewPort Communications Inc. and Silicon Spice Inc. in August for $1.24 billion and about $1 billion, respectively, and the pending acquisition of Allayer Communications for about $271 million.

Industry consensus seems to support Broadcom's sense of a good deal. "It's a great buy for Broadcom. This fills a hole in their portfolio," says Jim Smith, associate partner at Mohr Davidow Ventures. A key advantage, he says, is SiByte's use of MIPS processors licensed from MIPS Technologies Inc.. While SiByte is among the first vendors ever to put MIPS chips to work in network processors, a bunch of companies already use them for a range of other applications, so OEMs will have an incentive to buy chips for which software's already been developed.

In May of this year, SiByte received $40 million in funding from ATI Technologies Inc. (Nasdaq: ATYT: Toronto: ATY), Bowman Capital, Cisco Systems Inc. (Nasdaq: CSCO), Juniper Networks Inc. (Nasdaq: JNPR), and Raza Foundries.

Besides MIPS processing, the purchase of SiByte also brings Broadcom other advantages: Broadcom says SiByte's sold 1.3 million chips to unnamed customers. Also, it has approximately 120 new employees, all of whom will be invited to join Broadcom. Another plus is SiByte CEO Dan Dobberpuhl, a well-known and widely respected chip guru who worked on the Alpha and StronARM processors at Digital Equipment Corp. Dobberpuhl's set to join the Broadcom management team, but his title wasn't revealed at press time.

Others say Broadcom faces a challenge in integrating all the companies it's bought this year fast enough to win against a growing number of competitors, including the likes of Conexant Systems Inc. (Nasdaq: CNXT), NEC Corp. (Nasdaq: NIPNY), Toshiba Corp., and Texas Instruments Inc. -- all of which are fellow licensees of MIPS 64-bit processors.

At press time, Broadcom shares were down more than three points, trading at $218.94.

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

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