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Ikanos Reaches for DSL Breadth

A $54M deal would hand Conexant's DSL business to Ikanos, but the question is what it will do to Ikanos's bottom line

Craig Matsumoto

April 23, 2009

3 Min Read
Ikanos Reaches for DSL Breadth

Struggling chip companies Ikanos Communications Inc. (Nasdaq: IKAN) and Conexant Systems Inc. (Nasdaq: CNXT) reached a deal Wednesday that gives Ikanos a shot at being a larger-scale player while extracting Conexant from the telecom business.

Ikanos plans to buy Conexant's broadband division -- VDSL and ADSL chips, mostly -- for $54 million in cash, a deal being financed mostly by Tallwood Venture Capital . (See Conexant Sells BB Chip Unit.)

Tallwood is putting up $42 million by buying Ikanos stock at $1.75 per share. Tallwood also gets warrants to buy another $13.5 million in Ikanos stock at the same price within five years. Tallwood is involved because Ikanos can't fund the deal itself, given its cash reserves of $59.3 million.

Ikanos is best known as a VDSL chip supplier, and it's gotten into the home-gateway market with the 2006 purchase of the Fusiv chip line from Analog Devices Inc. (NYSE: ADI). (See Ikanos Goes for the Gateway.)

Conexant would add breadth, including its own lines of VDSL and ADSL chips. The broadband unit also includes PON chips, Ethernet switches, and small microprocessors.

So, Ikanos would get a lot bigger, quickly. On this morning's conference call with analysts, Ikanos CEO Michael Gulett estimated the acquired chunk of Conexant had $159 million in 2008 revenues compared with Ikanos's $106 million. The combined company would be No. 1 in VDSL market share and No. 2 in ADSL, Gulett estimated.

The deal also helps out Conexant, which has been trying to shed some of its businesses. Most recently, Conexant sold its broadband media processing line to NXP Semiconductors N.V. (Nasdaq: NXPI) for $110 million plus a possible $35 million bonus. (See Conexant Sheds Line.)

One communications product line Conexant would keep is embedded modems, including those that go into set-top boxes and computers. (See Conexant Bonds With Set-Tops .) Conexant would also have audio, video, and imaging chips that go into devices such as PC speakers, surveillance cameras, and printers.

It's unclear whether the broadband portion of Conexant is profitable. The issue could be important, considering Ikanos is losing money, and its market valuation of about $42 million is less than the amount of cash it's got.

"To me, it's like moving chairs on the deck," says Sandy Harrison, an analyst with Signal Hill Capital Group LLC . "I would have liked to see Conexant buy Ikanos, actually -- sort of what we saw with Centillium Communications Inc. and TranSwitch Corp. (Nasdaq: TXCC), where you remove the overhead cost of one public company." (See TranSwitch Sweeps Up Centillium.)

The idea of doing the deal in the other direction came up during the conference call. "This was the best possibility," Gulett said.

For its first quarter, which ended March 29, Ikanos reported revenues of $20.6 million and losses of $6.1 million, or 24 cents per share. The previous quarter, Ikanos reported revenues of $22.8 million and losses of $5.7 million, or 20 cents per share. (See Ikanos Reports Q1.)

The deal would leave Ikanos, Infineon Technologies AG (NYSE/Frankfurt: IFX), and Broadcom Corp. (Nasdaq: BRCM) as the main suppliers of DSL chips, further trimming down what used to be a widely fragmented market. (Infineon acquired the DSL business of Texas Instruments Inc. (NYSE: TXN) in 2007.) (See Infineon Buys TI Unit and Infineon DSL: Past & Future.)

Harrison says it makes sense that smaller players wouldn't be in DSL any more, because it can cost more than $10 million to get a cutting-edge chip just to the prototype stage. "The cost to unroll a next-generation chip in this space is unbearable."

Ikanos shares were down 6 cents (4.1%) at $1.40 in late trading. Conexant shares were up 15 cents (11.7%) at $1.43.

— Craig Matsumoto, West Coast Editor, Light Reading

About the Author(s)

Craig Matsumoto

Editor-in-Chief, Light Reading

Yes, THAT Craig Matsumoto – who used to be at Light Reading from 2002 until 2013 and then went away and did other stuff and now HE'S BACK! As Editor-in-Chief. Go Craig!!

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