April 30, 2001
Warning shot, wakeup call, or starting gun? However you want to assess the sound of Intel Corp.'s (Nasdaq: INTC) recent acquisition of three optical components companies (see Intel's 10-Gig Shopping Spree), it's clear that the world's largest chipmaker isn't quietly standing on the optical sidelines anymore.
Already the optical component industry's biggest single investor (through its Intel Capital arm), Intel is now planning to take advantage of market conditions to bring more technology in-house, part of the company's planned expansion into the fast-growing communications IC market.
"We have capital to spend, and now's a great time to invest and acquire," says Mike Ricci, vice president and general manager of the optical products group at Intel. "We've obviously not stopped. You can expect more acquisitions."
However, Intel's aggressive acquisition plans could cause some turmoil amongst its expansive optical investment portfolio, as those companies may now find themselves competing with one of their strategic investors. And at least one competing chip vendor says Intel's stepped-up acquisition strategy might make Intel portfolio companies suspect partners, which could lessen Intel's value as an investor.
One Intel portfolio company, Digital Optics Corp., is already rethinking the value of having Intel as an investor. "When Intel invested in us two-and-a-half years ago, we saw them as a strategic partner," says Kevin Drehmer, president of the Charlotte, N.C.-based Digital Optics Corp., which manufactures wafer-based optical components and subsystems. "If I knew then what I know today, would I do the same thing? It's hard to say."
According to Intel Capital's Website, the company has no fewer than 28 investments in optical startups, and industry sources say there are several more that the company has yet to disclose. Even as other venture capitalist firms slow down optical investments, Intel is keeping up its pace, participating in six funding rounds this year alone.
"They're very aggressive, and I think you'll end up seeing them buy more companies, especially in the next quarter or two," says Steve Krausz, a general partner at U.S. Venture Partners, which has partnered with Intel on several optical investments. "They [Intel] have been around long enough to know how not to overpay."
While the Intel brand name and the company's manufacturing smarts are enticing to many startups, the unanswered question about Intel's true intentions could make business tougher for some of them, according to Andrew Gottlieb, vice president of marketing at MMC Networks Inc. (Nasdaq: MMCN), the network-processor subsidiary (see AMCC Introduces Network Processors) of chipmaker Applied Micro Circuits Corp. (AMCC) (Nasdaq: AMCC).
"The acquisitions make us leery of partnering with people who have Intel as an investor," says Gottlieb, who says that Intel behaves differently than other communications IC vendors.
"If, say, Vitesse Semiconductor Corp. [Nasdaq: VTSS] were to buy a startup, we're still likely to work with them," Gottlieb says. "Intel, however, shuts it off completely -- it's the whole proprietary Wintel thing. So you just don't know what will happen to a company, should Intel decide to buy them."
Intel's Ricci, however, says an Intel investment is not necessarily an indication of a desire to partner with, or acquire, a startup.
"I don't think you can map [acquisitions] to six different things we may have in the portfolio," Ricci says. "The equity position we take doesn't always map one-to-one with our acquisition plans."
While Intel's not afraid to invest in companies in the same technological space, or even acquire companies that may compete with members of its portfolio, several portfolio firms say they're satisfied with Intel's integrity as an investor.
"Intel has been very professional, with a high level of integrity," says Andy Zhou, president and CEO of Optoplex, a startup manufacturer of passive components for the DWDM (dense wavelength-division multiplexing) market. Though Zhou says Intel's stepped-up acquisition pace has him a bit worried, he doesn't think the company will become a direct competitor to Optoplex.
"I think they [Intel] are more interested in the active components space," Zhou says. "Things like VCSELs [vertical cavity surface-emitting lasers] and indium phosphide chips should be in Intel's backyard."
Brian Peters, president of CWDM (coarse wavelength-division multiplexing) components startup Blaze Network Products Inc., says he's confident Intel the investor won't pass on his company's secrets to other, competing portfolio firms.
"I know that some of the Intel VCs know my costs, but their personal integrity appears high enough that they wouldn't disclose such information," Peters says.
Intel's Ricci says the company generally avoids taking active board seats in its investment companies, to lessen the chance for conflicts of interest. But he says Intel will continue to fund -- and acquire -- companies in similar spaces.
"When you're looking at 30 companies, there's a risk for overlap," Intel's Ricci says. "We try to avoid it, but it can happen."
Though Ricci didn't break out the percentage of Intel's total business that optical component products represent, he did say that it's easy to gauge Intel's interest in the overall market.
"It's pretty simple math, when you figure the [optical components] space is growing at 30 to 50 percent, even in the current market," Ricci says. "We still see a $50 billion components market by 2004."
That Intel plans to participate heavily in that market should come as no surprise to anyone involved -- even its investment partners.
"Anybody standing on the sidelines, or in the game, with Intel, had to wonder that they were probably not just in this to invest," says Digital Optics' Drehmer. "You had to think they were interested in the playing field."
-- Paul Kapustka, Editor at Large, Light Reading http://www.lightreading.com
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