Only one year after being spun off by Rockwell International Corp., communications-chip maker Conexant Systems Inc. is sizzling on Wall Street, envied by competitors and admired by its OEM customers.
The company appears determined to maintain that competitive edge, which in one year pushed its stock price up as much as 1,028%, to a high of $76.19 from about $6.75. Two weeks ago, Conexant bought into the network-processor space by agreeing to pay about $990 million in stock for start-up Maker Communications Inc.
That move closes a hole in Conexant's product offering and cements its relationship with two of its major customers, Cisco Systems Inc. and Nortel Networks Corp.
"Conexant is executing on all cylinders," said Arun Veerappan, an analyst at Robertson Stephens Inc., San Francisco. "We expect the company to grow revenue about 10% sequentially for the December quarter, but to grow earnings at an even faster rate due to expense leverage."
For Maker, based in Framingham, Mass., Conexant's offer to pay about $43.76 per share represents a premium of about 34%, based on its closing price on Dec. 19. Conexant benefits from the deal because Maker has established products and customer ties in the emerging network-processor market, attributes few others have, analysts and executives noted.
Both Conexant and Maker supply chips and software to Cisco and Nortel, though their products are used at different process points.
Dwight W. Decker, chairman and chief executive of Conexant, Newport Beach, Calif., said that the company is nearly a year past its successful initial public offering, and that acquisitions like that of Maker are a key component of its growth strategy. The network-processor segment is expected to grow 100% next year, he said. "Within the network-processor market, Maker is a power, with solidly established products and revenue."
Although the two companies share some overlap in ATM applications, Conexant focuses primarily on physical-layer ICs. Acquiring Maker's network-processor business allows Conexant access to the Layer 2, 3, and 4 switch market. For example, products like Maker's MXT5100 Edge Stream Processor, which begins sampling this month, are necessary to deploy DSL and other WAN-based services.
"In ATM, Maker held a unique position," said Greg Sheppard, an analyst at Dataquest Inc., San Jose. "In the network-processor market, its 622-Mbit SAR chip [the MXT3020] is actually the de facto standard."
The transaction has been approved by directors of both companies, as well as shareholders owning about 35% of Maker's stock. The deal still requires regulatory approval, but executives said they expect it to be completed within 90 days.
Although Conexant will be paying approximately $12.4 million per each of Maker's 80 or so employees, the deal is not that unusual. Ciena Corp. offered about $550 million in stock for optical-transmission start-up Omnia Communications Inc. in March, and Cisco's $6.9 billion stock swap with Cerent Corp. in August equaled about $24 million per employee.
"It's a big number, but not without historical precedent," said analyst Mark Edelstone of Morgan Stanley Dean Witter, San Francisco.