They may be comparatively small in this multibillion-dollar-merger age, but the two purchases landed this week by Analog Devices Inc. could foreshadow a more acquisitive era at the company as it bolsters its already strong position in the broadband-communications market.
Like its chief rival, Texas Instruments Inc., ADI has developed an almost fanatical focus on DSP and analog in the past few years. But where TI has used a series of high-profile divestitures to fuel an acquisition spree -- culminating earlier this year in the $7.6 billion purchase of Burr-Brown --ADI's growth has been largely organic.
That may be changing, according to some observers. In September, ADI issued notes to raise $1 billion in cash, bringing its on-hand reserves to $2.3 billion, up from only $762,000 a year ago. ADI also has an option to issue notes for an additional $200 million.
"We've had terrific revenue growth of 78% in the past year, and it has led us to believe that certainly, over time, Analog can be a much larger company," a spokesman said.
"Analog Devices has done pretty well for itself by not making many acquisitions in the past," said Drew Peck, an analyst at SG Cowen Securities Corp., Boston. "I think the motivation of these latest acquisitions has more to do with expediting their recruitment of engineers than anything else. I suspect, however, they want to make sure they're in position to take advantage of any major opportunity should it come along."
Peck believes future acquisition activity for ADI could be centered around wireless communications, where the company began to make inroads into the cellular-handset sector with its announcement earlier this month that it will supply Siemens AG with chipsets for GSM/GPRS phones.
"The wireless market is growing and the technologies are turning over very quickly," he said. "The inchoate state of wireless PDAs means that market is up for grabs."
ADI last week announced plans to acquire Chiplogic Inc., a developer of ICs and software focused on broadband access and network-protocol processing, for 1.65 million shares of stock valued at about $100 million. In addition, the company said it has completed the acquisition of Thomas Neuroth AG, a Vienna-based engineering design firm focused on symmetric DSL (SDSL), for an undisclosed amount of cash.
The Chiplogic acquisition will provide ADI with about 100 employees, which will be split between Chiplogic's headquarters in Santa Clara, Calif., and its development center in Hyderabad, India. Thomas Neuroth has about 20 design engineers."Getting a critical mass of engineers is increasingly difficult," Peck said. "It has become de rigueur these days to basically hire through acquisition. The shortages of engineering talent, particularly in the analog business, are legendary."
The ADI acquisitions, although relatively small, are strategic to existing businesses where the company could eventually lead the market, said Will Strauss, an analyst at Forward Concepts Co., Tempe, Ariz.
"One [Thomas Neuroth] moves them forward a generation of product in a market where they're already No. 1, and the other [Chiplogic] moves them up the food chain," Strauss said.
ADI is currently the leading merchant supplier of ICs to the asymmetric DSL (ADSL) market, according to Strauss. Alcatel is the largest supplier of DSL, but its devices, which are based primarily on semiconductors made by LSI Logic Corp. and STMicroelectronics Inc., are used primarily in Alcatel's own end equipment.
As part of its recent fiscal year 2000 report, ADI executives said the company shipped more than 8 million DSL chipsets and more than 20 million line drivers. For calendar 2000, ADI should ship 10 million to 11 million DSL chipsets and about 16 million in fiscal year 2001, said Russ Johnsen, vice president and general manager of ADI's Communications Products Division, Norwood, Mass.
By comparison, TI announced in November that it has shipped more than 3 million DSL chipsets in the first nine months of 2000 and 8 million line drivers.
"Analog Devices wants to maintain its dominance in this segment," Strauss said. "It represents some of the best opportunities for them going forward."
ADI's ADSL efforts have primarily been centered on the physical layer, and work that has been going on at Chiplogic provides established technology for Layer 2 through 4 technologies such as ATM processing, switching protocols, TCP/IP protocols, and voice processing, Johnsen said.
"We'll be able to create a single-chip convergence processor with a physical-layer implementation," he said. "A lot of this technology we already have a good presence in, ... and eventually we could do it all. [The Chiplogic purchase] turns out to be very complementary in terms of things we're currently doing, and things as yet unannounced in terms of our DSP road map."
Chiplogic is a "pre-revenue" business, Johnsen said, and the first ADI products incorporating the acquired technology will be announced in 2001. ADI plans to keep both Chiplogic facilities in operation. Current Chiplogic president and chief executive Hari Surapaneni, will direct the new business, which will have a separate P&L and report to Johnsen's division.
ADI also plans to keep the Thomas Neuroth operations in Austria, but that business will be merged into ADI's broadband-access operations.
Although ADI has some SDSL efforts in place, the addition of Thomas Neuroth engineers should accelerate the effort for a technology expected to increase in demand over the next few years.
"It's become pretty clear that G.SHDSL is going to take over a lot of the current ADSL market because of the advantages in terms of speed and how it degrades gracefully over longer distances," Strauss said.
SDSL allows for the same data rates upstream and downstream, and G.SHDSL is expected to be particularly suited for small office/home office and multitenant applications. G.SHDSL is expected to begin accelerating if the ITU approves standards as expected early next year, Strauss said.