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.
Broadcom certainly benefitted by hiring away the best and brightest from Conexant, perhaps getting design, process, and customer ideas in the process.
The telecom bubble (not the dot-com bubble) was the big disaster. Stock dropped at Nortel from 100 to 1 dollar, with big 3x gains from $1 to $3 for the bottom fishers. That magnitude certainly highlighted the problem with the entire broadband vision.
1. Fiber Optic drivers and cable were put in place with great speed, giving 8x and then 4x again speed improvements, for the backbone systems from city to city, country to country. That was a 15 year glut in capacity, as nobody was working on "the last mile" at that time.
2. Instead of a 2x jump every 2 years roughly, like Moores law in chip world, these guys thought that they could create 8x improvement immediately, and then 4x more every few years, playing color games in fiber...which they did, as telecoms and cable people competed to get to each city, then each zone, and "some day" link up to my house and your house.
3. So all the old Conexant CEO's and VP's can blame the telecom industry for creating a huge short term bubble, and great opportunity for those that saw it coming. See Qualcomm who had cellular as well as internet IP in place, to weather the storm and cash in on the convergence.
5. What next for Conexant? The food is good in Newport, as is the sailing, so they should be able to hire a top notch CTO and CEO and CFO team that may take advantage of the lower debt load now, and maybe they can hire back a few of the best and the brightest and maybe change the brand name?
Having worked at the early days in both companies, I can tell you the two mgmt teams were miles apart. the Henry's were brash, disruptive, and forward looking, CNXT (names to remain nameless) were conservative and content with a thriving analog modem business which unknown to their near sightedness, looked like it was going up into the clouds, but actually was about to fall off a cliff.
Conexant had a choice to raise convertible debt or issue shares when they hit $12B in mkt cap. PMCS, AMCC etc issued shares and diluted and stock went down a bit as it was bubble time anyway. Conexant CFO decided to issue Convertible Debt and management cashed out of the stovk. Most debt did not convert and after a decade they stil have 100s of millions left to pay. Other comments in this article are spot on. How a great technology company can be mis-managed to bankruptcy, they need to learn from erstwhile Conexant senior leadership.
Actually, this was a canny strategic move by the CEO. Kudos. This company has been hobbled with excessive legacy debt for years, and a pre-pkg BK means they can finally move forward... with the help of a golden angel here or there. Not predicting miracles, but don't be shocked if they move to go public again in the intermediate term.
Wonderful analysis in a very short amount of time!
Sound like the Maker acquisition was one of the biggest blunders, coming when many people were trying to jump ahead of "the long boom" Wired and others predicted with bets in optical communications that went south in the dotcom bust.
All Conexant CEOs and presidents/co-presidents were responsible for the plight of the company. As a Rockwell spinoff, it had excellent product portfolio IP and product portfolio and a very solid engineering team with excellent DSP/analog technology. Dwight Decker, Dan Artusi, Scott Mercer, Sailesh Chittipeddi and Christian Scherp let the company down by making financial and strategic blunders. None of these CEOs very visionaries or had any technical depth or understood the markets well. Sad.
I have fond memories of working with some great Conexant engineers on a JV back in the late 90s/early 00s. It was a shame to see the company continue to shrink to such a level, much as my former employer did -- not only through market changes, but also due to simple divestiture. Those divestments may have brought in lots of cash and unleashed shareholder value, but when taken to extreme, the remaining so-called core business is often not sustainable.
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