What began as a pet project of Cypress Semiconductor Corp.'s head honcho blossomed last week into a $180 million deal that puts the company in possession of what some consider the basic building block of future optical network switches.
With its agreement to acquire Silicon Light Machines, a Sunnyvale, Calif., developer of a niche technology used in high-end digital displays, Cypress becomes a key supplier of a component analysts believe will be as important to fiber-optic communications as the transistor is to electronics.
The stakes are high. The optical transport-systems market, including chips for Sonet/SDH, Wavelength Division Multiplexing (WDM), and digital cross-connect systems, is expected to grow from $43.8 billion this year to $89.3 billion in 2003, according to RHK Inc., South San Francisco. Over the same period, the optical-components market is estimated to grow from $9.3 billion to $22 billion.
Of the total available market, components for optical switches account for tens of millions of dollars, but will grow to nearly $600 million in the next three or four years, according to Pete Farmer, an analyst at Strategies Unlimited in Mountain View, Calif.
What Silicon Light Machines (SLM) will bring to the table is Grating Light Valve (GLV) technology, a form of microelectromechanical systems (MEMS) that uses tiny movable ribbons to direct light beams. It was developed at Stanford University, originally as an alternative to the mirrored micromachines built by Texas Instruments Inc. for digital theater applications, an area in which T.J. Rodgers, president and chief executive of San Jose-based Cypress, has a personal interest.
Only recently have MEMS techniques come to the fore as a way to switch electrical signals onto a fiber network. In the past year, leaders in optical communications have paid dearly to get their hands on the capability. Earlier this year, for example, Nortel Networks Corp. shelled out $3.25 billion for XROS Inc., a developer of an optical switch that had yet to produce any revenue.
When SLM sold Sony Corp. the exclusive rights to use its GLV technique for displays, Cypress -- a minority investor in SLM and the foundry for its chips -- was able to get the rest for a song.
"There was no grand plan" to enter the fiber-optic-components market, Rodgers said. Rather, he described the deal as a "one-time event precipitated by a strange set of circumstances that can't replicate itself."
The move is the latest in a series of acquisitions that has allowed Cypress to break out of its role as a supplier of commodity memory chips and align its product development with those of its largest customers: Alcatel, Motorola, Nortel, Lucent, Cisco, and 3Com.
"Increasing our penetration of the optical-components market is something our strategic networking customers have encouraged us to pursue," said Dan McCranie, Cypress' executive vice president of new-business development. "The SLM deal will enable Cypress to tap into one of the fastest-growing, highest-margin segments of the communications business."
Five-year-old SLM has developed several technologies fundamental to imaging that are directly applicable to a variety of optical-networking-component applications, such as tunable filters, variable optical attenuators, modulators, and optical add/drop multiplexers.
Cypress is hoping to use SLM's GLV technology to integrate MEMS components with its own electronic circuitry to convert light into electricity in one monolithic chip, Rodgers said. Initial products may include variable optical attenuators, such as those currently supplied by JDS Uniphase, with the aim of bringing the manufacturing cost down from $100 to less than $10.
It's a natural step for a semiconductor company to take, Strategies Unlimited's Farmer said. "The ability to move information onto and off of optical networks and manage those networks requires electronic technology," he said.
As logical as the evolution seems, the manufacturing issues are formidable. Cypress has been producing SLM's MEMS components since 1998 using the same CMOS production line that produces its physical-layer chips, but has yet to undertake an integrated semiconductor/MEMS device. Initial product development is expected to take at least a year.Today, only Lucent Microelectronics and Nortel have the capability to produce both optical and electronic components, Farmer said.
"I believe we'll see all of the major semiconductor companies pushing into optical networking components in the next year," he said.
The GLV technology uses seven mask steps and large geometries, but produces 100% yields in a modern fab. "It's quite possible for us to integrate an entire CMOS wafer with driver circuitry and integrate on top of that wafer, after doing chemical mechanical polishing, an entire optical structure," Rodgers said.
The acquisition, which will be accounted for as a merger, calls for Cypress to issue 3.7 million shares of stock in exchange for all outstanding stock and options of SLM. The deal is expected to be completed by the end of August, pending shareholder and regulatory approval.
SLM, which has 52 employees, will become a wholly owned subsidiary of Cypress with autonomy to pursue various avenues of optical technology. Its revenue initially will come from royalties on its GLV technology.