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TranSwitch Harvests Startup

Light Reading
News Analysis
Light Reading
8/21/2001

When chip maker TranSwitch Corp. (Nasdaq: TXCC) announced its decision to acquire startup Onex Communications Corp. at the end of last week, it marked the vendor's first move away from its traditional product portfolio in access, and into the market for metro and core networking chips (see TranSwitch to Acquire Onex).

Onex is developing so-called "system silicon." It's proposing to replace the zillions of different types of chips found on line and switch cards with just two types of programmable chip -- a "service processor" and a "switch processor." These will be able to handle any type of traffic in its native format, whether it be voice or data, at OC48 (2.488 Gbit/s) speeds and upwards. (see Onex to Offer 'God Chip').

TranSwitch, on the other hand, is known for its access network chips. It currently offers a range of chips targeting telecom networks (not data) from T1/E1 (1.544- and 2.048-Mbit/s) speeds up to 622 Mbit/s.

The acquisition didn't come completely out of the blue, however. TranSwitch and Onex have a history that goes right back to the startup's formation in May 1999. Although TranSwitch doesn't like to label the startup as a spin-out, it can't deny the strong connections. Subhash Roy, Onex's CTO and primary inventor of its technology, is a former TranSwitch engineer. Onex co-founder and president, Phil Nyborg, was a consultant to TranSwitch from its inception in 1988 through to its initial public offering.

Pretty early on in its life, Onex entered into a "strategic partnership" with TranSwitch. TranSwitch took an equity stake of "less than 20 percent" in Onex and handed over intellectual properties and access to its sales channel in return.

To buy out the remaining shares in Onex, TranSwitch has struck a deal for $20 million cash and 6 million shares, which were worth about $55 million when the deal was announced.

The timing of the deal raised some questions in a conference call last Friday. Onex has yet to prove its technology by shipping products, although it does claim to have two design wins -- one of which is likely to be Polaris Networks, a startup developing a God box (see Polaris Builds a God Box).

Rather than wait until customer money is in the bank -- which will be another year at least -- TranSwitch decided it had the confidence to stake its claim early and keep the price tag of the acquisition down, according to the company's CFO Peter Tallian.

This could be a story that repeats itself over and over. TranSwitch has made strategic investments in a number of startup companies over the past few years, picking those that complement its current product line. Onex was the first.

Other irons in the fire are Optix Networks, a developer of chips for OC192 (10 Gbit/s) and OC768 (40 Gbit/s) networks, which was brought into the TranSwitch circle in April 2000.

Then, in January 2001, it invested in wireless chip maker Intellectual Property for Integrated Circuits Inc. (ic4ic) In March 2001, it struck up a partnership with a slightly less awkwardly named company, Systems on Silicon Inc. (SoSi), one of Milton Chang's incubated startups.

Finally, just last month (July 2001), it made an investment outside electronics, with Israeli startup TeraOp Inc., which is developing micro-electro-mechanical systems, or MEMS (see TranSwitch Invests in TeraOp).

— Pauline Rigby, Senior Editor, Light Reading
http://www.lightreading.com

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