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Comms chips

Extreme Equity

3:40 PM -- Cypress Semiconductor Corp. (NYSE: CY) has been named as the next possible target for private equity groups. This would follow up the high-profile sale of a majority stake in the Royal Philips Electronics NV (NYSE: PHG; Amsterdam: PHI) semiconductor arm and the pending offer for Freescale Semiconductor Inc. , the $6 billion-a-year former unit of Motorola Inc. (NYSE: MOT).

We'd caught a rumor that Extreme Networks Inc. (Nasdaq: EXTR) had talked to a private equity group, but that deal seems less likely to go down, and the reasons spell out a key difference between the chip industry and the telecom-gear business.

The thinking goes like this: After completing one of these deals, a private equity firm tends to convert some of its equity into debt, receiving cash while pushing some of the deal's risk onto somebody else. So, for a typical taking-private deal to work, the buyers need to get a predictable revenue stream out of the company -- money to pay off the debt. And if there's one thing Extreme lacks right now, it's a predictable revenue stream. (See Extreme Slump Continues and Extreme Scores Hat Trick.)

Chips get hit with problems, too, such as the inventory glut that seems to follow each surge in demand. (See Ikanos Catches VDSL Blues.) But chip companies have an air of stability. They get to sign deals that bring in money for a few quarters at a time, whereas equipment vendors, which sell in smaller quantities to fewer customers, are subject to service providers' cycles of on-again, off-again demand.

Some private equity firm might well sense opportunity in Extreme. But the next deal is more likely to happen in semiconductors (or software -- Open Solutions Inc., catering to the banking industry, got snapped up for $1.3 billion this week).

Cypress could certainly be an interesting choice -- CEO T.J. Rodgers is Silicon Valley's most outspoken exec, plus he revels in explaining this sort of stuff and has a flair for economics. He'd be the one to argue why a private-equity deal makes sense for Cypress (or why it doesn't, should the rumor hit the scrap heap).

— Craig Matsumoto, Senior Editor, Light Reading

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