After several years of lackluster performance, Conexant Systems Inc. continues to try to buy its way into the elite ranks of communications-IC companies. Conexant last week agreed to make its fourth acquisition in the past seven months: a $400 million stock deal for switch-fabric specialist HotRail Inc.
The Newport Beach, Calif., company, formerly Rockwell Semiconductor Systems, has identified the markets it wants to participate in and is moving aggressively toward strengthening its position in them, according to Charles Boucher, an analyst at Bear, Stearns & Co. Inc., San Francisco.
"They now have some excellent growth engines, and their track record to date, in terms of being able to integrate these acquisitions, has been pretty impressive," Boucher said. "They can now be considered in the category of a Texas Instruments or STMicroelectronics, as far as addressable markets and breadth of technology."
Since December, Conexant-carrying out its strategy of being a pure-play communications-IC manufacturer-has acquired Maker Communications, a supplier of network processors and software; Microcosm, a provider of optical transceivers; and Applied Telecom, a telecommunications-software company.
"The challenge is always to integrate such companies effectively, retain key talent, and have a uniform, homogenous machine," Boucher said. "I do think the companies Conexant is buying are very relevant to its future road map."
The acquisitions are part of a trend among communications-IC companies toward consolidation, which is likely to continue, said Will Strauss, an analyst at Forward Concepts Co., Tempe, Ariz.
"Everyone's trying to acquire now before the party's over," Strauss said. "There are a lot of companies trying to bulk up, and when the music stops, they don't want to be the one left without a chair. There are also a lot of start-ups out there that are reluctant now to go with an IPO because of strange stock market conditions."
HotRail's capabilities run to mixed-signal and digital-logic design. The San Jose-based company has developed CMOS transceivers and switch fabrics used in high-speed switching, interconnect, and scalable processing in Internet-infrastructure equipment. HotRail is developing switch fabrics that will offer up to 256-Gbit/s switching capacity in a single chip.
"With the increasing complexity of communications equipment for the Internet infrastructure, our customers are looking for comprehensive, robust, and innovative solutions from their key suppliers," said Dwight W. Decker, chairman and chief executive of Conexant.
"HotRail will allow us to accelerate our strategy of delivering the complete silicon solutions our customers require," he said. "The addition of HotRail's innovative switching and interconnect technology to our comprehensive portfolio of semiconductor products [allows Conexant] to offer the major components of a total networking-system solution."
HotRail will become part of Conexant's Broadband Internetworking Systems, a newly formed unit within the company's Network Access Division. The division is Conexant's fastest-growing operation, posting a 90% growth rate from 1998 to 1999 and tracking toward a similar performance in 2000, according to Decker.
For its fiscal 2000 second quarter, which ended March 31, Conexant reported that 25% of its revenue was derived from the division.
The company has experienced strong growth the past 18 months. After reporting a loss of $262,000 on revenue of $1.2 billion in fiscal 1998, Conexant had net income of $12.9 million on revenue of $1.4 billion in fiscal 1999.
Through the first half of fiscal 2000, Conexant has reported net income of $1.5 million on revenue of $1 billion. Analysts estimate the company will accrue revenue of more than $2 billion in its current fiscal year, and will approach $3 billion next year.
Part of Conexant's strength lies in the fact that despite its singular focus on communications, the company has one of the broadest product portfolios in the industry, according to Bear, Stearns' Boucher.
"They have a lot of different markets they're serving," he said. "They've been strengthening their technology foundation in the network infrastructure and access markets so that they can continue to participate in the growth going on there by capturing semiconductor content in those systems."
HotRail is particularly important to Conexant's Internet-infrastructure efforts because switch-fabric products are often the framework components chosen first by OEMs when designing equipment, Decker said.
"We'll be in much better position to influence the full design of next-generation Internet equipment," he said.
Conexant will acquire HotRail in exchange for 7.8 million shares of Conexant stock, which has a total current value of about $400 million.