Intel Snatches VOIP Startup for $550M

Move puts Intel deeper into the communications chip space

February 26, 2001

4 Min Read
Intel Snatches VOIP Startup for $550M

Intel Corp. (Nasdaq: INTC) said it plans to spend $550 million on VxTel Inc., a startup that makes voice-over-IP (VOIP) digital signal processors (DSPs). The deal is expected to close in the second quarter of this year (see Intel to Acquire VxTel for $550 Million).

What's it all mean? The deal testifies to Intel's rising ambitions in the market for next-generation network processors and broadband services.

"Today's carriers support separate circuit-switched voice networks and packet-based data networks," Mark Christensen, VP and general manager of Intel's Network Communications Group, told analysts today in a conference call. "Two networks are cumbersome and expensive to manage and expand."

Intel hopes to alleviate the problem, he says, by offering board-level products equipped with VxTel's voice-packetizing DSPs. Christensen says these components will enable carriers to unify voice, data, and video on their IP networks. This will lead to the offering of money-making services, he says, and it will help carriers ditch expensive leased lines and move everything to an optical infrastructure.

The purchase of VxTel follows at least nine months during which Intel's been integrating VxTel's DSPs into boards made by its Dialogic Corp. subsidiary, which makes telephony and multimedia boards for Intel servers. Christensen gave no date for shipment, but he did indicate VxTel's already been sampling its wares with carrier customers.

Intel has become increasingly interested in the network processing business. Network processors, such as the ones in trial at VxTel, are chipsets designed to perform specific functions, which otherwise require costly custom ASICs (application-specific integrated circuits) (see Network Processors Proliferate). A slew of vendors, particularly ones with an eye on the optical space, have rushed into business over the last few months.

Given the potential importance of the VxTel purchase and its potential role in Intel's broadband future, it's puzzling that the company billed the announcement as secondary to a product rollout of a gigabit Ethernet controller. Indeed, the conference call presentation began with Christensen reiterating the gigabit Ethernet announcement, then tacking on the news of VxTel.

But analysts say there's nothing second-rate about the buy. "VxTel's a gem," says Charlie Glavin, director at Credit Suisse First Boston. Other companies have been developing in this area for some time, he says, including Silicon Spice, bought for $1 billion by Intel archrival Broadcom Corp. (Nasdaq: BRCM) in October (see Broadcom's on a Buying Spree). But, he says, it's widely recognized that VxTel has something special.

According to Intel and VxTel, one of the startup's differentiators is its ability to support a high density of voice channels. "We can put 2,000 voice channels on a single PCI blade," boasts Shri Dodani, the CEO of VxTel, who will continue to lead the company as a wholly owned subsidiary of Intel.

Unfortunately, it's tough to prove Dodani's claims, since Intel and VxTel are holding the vital stats of the startup close to the vest. VxTel has realized no revenue and has no known customers except Intel. Even the number of employees is being kept secret, Intel says, "for competitive reasons."

Here's what is known: VxTel was launched in March 1999, and it's had a long and impressive list of backers, including Bowman Capital, Raza Foundries, Sequoia Capital, and TeleSoft Partners -- to name a few. Vendor-based investors also have joined in, including ADC Telecommunications Inc. (Nasdaq: ADCT), Applied Micro Circuits Corp. (AMCC) (Nasdaq: AMCC), Tellabs Inc. (Nasdaq: TLAB; Frankfurt: BTLA), Virata Corp. (Nasdaq: VRTA), and Vitesse Semiconductor Corp. (Nasdaq: VTSS).

As of October 2000, the startup had garnered $75 million from these sources. No information is available on whether it secured subsequent funding.

Intel plans to incorporate all of VxTel's development locations (including facilities in Fremont and Irvine, California; Boulder, Colorado; and Bangalore, India). All employees will be retained.

Analysts think Intel's purchase signals the start of a run of acquisitions. "A company like this might have been prohibitively expensive six months ago," says Charlie Glavin.

Intel's Christensen acknowledged the economic climate is favorable to Intel's continuing plan to acquire companies that have technology it can't afford to make in a timely fashion. "It would have taken us several years to get this technology, and then the market would have moved beyond us," he said. Christensen pointed out that Intel gets roughly one-third of its revenues from companies it's acquired -- many of which aren't publicly announced. Intel's spent about $2.7 billion on 16 acquisitions over the past year, he asserts, and intends to continue buying.

-- Mary Jander, senior editor, Light Reading

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