SAN JOSE, Calif. – Broadcom's $3.7 billion bid for NetLogic marks a bold and surprising attack from the rear in communications processors. The deal is an unusually large one for Broadcom, opening it up to address a $6 billion market currently owned by Freescale, Intel and Cavium Networks.
NetLogic ranks fourth in embedded processors for comms gear such as routers, switches and base stations at just five percent market share. That's well behind Freescale (45 percent), Intel (23 percent) and Cavium (nine percent), according to figures from market watcher Linley Group (Mountain View, Calif.).
"It's pretty surprising because Broadcom has not generally done these sorts of big acquisitions, and this wasn’t a segment where we thought Broadcom was that focused—they have looked more on consumer segments for growth," said Linley Gwennap, principal of the Linley Group.
Before the deal, Broadcom had no position in the kinds of embedded comms processors that make up the majority of NetLogic's business. The fact that both companies are heavy users of MIPS cores opens up other synergies in the future, said Gwennap.
Although NetLogic trails competitors in market share, a big chunk of its business is with the top players. Cisco made up more than 20 percent and China's fast-rising players Huawei and ZTE made up about 15 percent each of NetLogic's business in its last six months of reported sales.
Broadcom's bid is in part a bet on the future. NetLogic's XLP processors are expected to leapfrog Cavium's Octeon products which to date have been technically superior and ahead in the market compared to NetLogic's existing XLR and XLS chips.
NetLogic just started shipping its XLP chips and announced their follow-ons, the quad threaded XLP II with up to 20 cores will sample next year. "On paper, the XLP looks pretty good," said Gwennap.
The XLP is expected to offer similar performance to the Octeon II. However the NetLogic part can be combined with more chips in a multiprocessor arrangement to hit higher performance levels than Octeon, Gwennap suggested.
Broadcom "strengthens NetLogic and makes them more viable," on many fronts, he added. Broadcom can improve NetLogic's access to the leading 40 and 28nm process technologies used for the XLP chips. Broadcom also can wrap its broad portfolio of other comms chips around the parts to reach more deeply and broadly into OEM systems makers.
The deal marks a break from Broadcom's tuck-in style of buying small, hot startups that give it an instant position in emerging technology that can later be integrated into its broader chip sets.
NetLogic's big price tag stems in part from its robust revenue growth. Its sales nearly doubled last year after two major acquisitions of its own and is expected to rise more than 10 percent this year.
The purchase price was a whopping 8.7 times NetLogic's projected 2011 sales of $423 and a 69 percent premium over NetLogic’s average stock price over the 20 trading days, according to Bloomberg. The average premium for about 135 similar deals was 25 percent over the past five years, Bloomberg said.
NetLogic is itself the product of acquisitions. It bought its embedded processors with RMI Corp. for about $200 million in stock and cash in a deal that closed in October 2009. It bought layer 7 packet processing chips from Integrated Device Technology in July 2009 for just under $100 million.
The deals helped double NetLogic's revenues but also sank its fledgling profits which had just crossed into black after several years of losses. The company reported a net loss of $66.4 million and $47.2 million during 2010 and 2009, respectively.
NetLogic resumed its acquisitions in April this year when it bought Optichron Inc., a privately-held provider of 3G/4G LTE base station digital front-end processors for $77.2 million.
Broadcom may have chosen NetLogic over Cavium in part for the diversity of getting layer-7 and wireless base station chips along with the embedded comms processors, Gwennap said.
Now that Broadcom passed over Cavium, it's not likely that company will find another suitor. Gwennap discounted Marvell as a possible buyer.
Marvell is focused on driving its ARM-based Armada chips into mobile systems where it has yet to gain significant traction. As such it is likely to see a large acquisition for MIPS-based comms gear as a distraction.