Madison, Wis.--Both Broadcom Corp. and Conexant Systems Inc. deployed aggressive acquisition strategies in similar market segments starting in the late 1990’s—each company betting the farm on the burgeoning broadband market. In the end, they achieved spectacularly different results.
Broadcom (Irvine, Calif.), today armed with $8.01 billion in annual revenue, is the world’s second largest fabless chip company after Qualcomm Inc.. On the other hand, Conexant, who saw its revenue decline from $2.1 billion in 2000 to just $135 million in 2012, is fighting for survival.
Conexant last Friday (March 1) filed for Chapter 11 protection in the U.S. Bankruptcy Court for the District of Delaware.
Under the terms of the restructuring plan, Conexant's sole secured lender, QP SFM Capital Holdings Ltd., will provide $15 million in debtor-in-possession (DIP) financing.
Further, QP SFM Capital Holdings will exchange $195 million of secured debt into equity in the reorganized Conexant, an action that will wipe out all of Conexant’s outstanding secured debt.
“We’ve been suffering from the debt overhang for a long time,” said Sailesh Chittipeddi (right), Conexant's president and CEO, in an interview with EE Times. Chittipeddi referenced the company’s feverish shopping spree in 1999.
During the 11 months between August 1999 and July 2000, Conexant acquired seven companies for just under $2 billion in Conexant stock, Chittipeddi explained. “This was something we needed to address as soon as possible,” he added.
The story of Conexant is typical of a vicious cycle. Conexant acquired a significant amount of debt in order to generate operating capital--for a number of the companies it acquired, and for its own ongoing business--all while it also had to deal with its existing debt. The burden of servicing that debt eventually caught up with Conexant.
Worse, aware of the constant pressure to service debt whose due date looms large, “Our blue-chip customers started questioning viability of our company and migrating away from us,” Chittipeddi said.
The fact that Eastman Kodak, for whom Conexant was the sole source of printer SoCs, filed for bankruptcy last year intensified Conexant’s crisis.
Fortunately for Conexant, said Chittipeddi, “we had to deal with only one lender – QP SFM Capital Holding – to negotiate the terms of a restructuring, rather than multiple parties.” Further, it also helped that QP SFM Capital Holding, managed by Soros Fund Management LLC founded by billionaire George Soros, was no stranger to Conexant’s business, since the capital investment fund has been Conexant’s lender for a long time.
However, convincing the lender that Conexant has a viable, long-term strategy with a solid portfolio was another matter. It took from May 2012 until last week to negotiate and structure a restructuring plan.
Conexant, now with a significantly reduced portfolio, has several solid “growth engines,” according to Chittipeddi.
I always find it odd when companies involved in what should be a thriving business area, end up struggling or failing. But then again, back in the '90s and '00s, wasn't it obvious to everyone that this ever-important "growth" was primarily achieved through acquisitions? How can any sensible person get excited about that kind of growth?
Conexant spun off from my company, and our group was sold off to another company. Many top notch engineers at Conexant. I have to believe the analysis in the article is correct. Too much of this "growth by acquisition," as opposed to growth by creating new market demand, and an underestimation of the cash suction those acquisitions would create.
Lessons one wishes the politicians and government bureaucrats would also take to heart. Staggering and growing debt will ultimately be the undoing of any organization, including a government.
There was huge mismanagement at the CEO level at this company that has left a lot of people lose their jobs. Not a single CEO had the right technical or marketing background to steer the company and so the downward spiral precipitated by financial mismanagement. The current CEO was a "get lucky person" with an operations background who has neither a marketing or technical background to retarget it to new markets. It still has very good engineers who stuck with the company. It needs a good CEO. It has the DNA to execute well on the engineering front.
Here's an example of what sort of problems Conexant has, and why it's so difficult to work with them. Great FAE - absolutely fantastic FAE. Great support, wonderful products.
Then comes the reality: Order a dev kit. No inventory. Order samples. No inventory. Order parts. No call back from the Distributor, nuHorizons. Period.
Our FY2013 for the CX93610 is 25,000 units.
Our FY2014 for the CX93610 is ~240,000 units.
And possibly higher.
So after designing their part into our product, we can't get the parts, and we need to go in another direction. Such a bitter pill to swallow.
That is Conexant.
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