Kanata, Ontario -- Mitel Corp. expects the sale of its systems business to free the company's semiconductor operation to focus on fast-growing communications-IC markets and to gain more visibility as a merchant-chip supplier.
Mitel today announced that it has signed a letter of intent to sell for about $232 million its Communications Systems division to companies controlled by Terence H. Matthews, a Kanata businessman and founder of Mitel and Newbridge Networks Corp. Matthews, also chairman of March Networks Corp., declined to specify the companies involved in the acquisition.
Mitel had previously said it planned to split its semiconductor and communications systems businesses.
"We are taking a significant step in our evolution and sending a clear signal that we will focus on the opportunities and challenges of the communications semiconductor market," said Kirk Mandy, Mitel president and chief executive. "We turn a fresh page on our future knowing that both businesses will be well placed for success."
As a stand-alone company, Mitel Semiconductor expects to quadruple its revenue in the next five years, said Francois Cordeau, the company's senior vice president and general manager. "We definitely want to increase our visibility to the world-the community of engineers and the investment community," Cordeau said.
"Concentrating on the semiconductor business will allow us more freedom and a greater availability of capital to fuel the acquisitions we need to make," he said. "We see the industry consolidating over the next few years, and we want to be a consolidator during that phase."
Last week, Mitel's stock on the New York Stock Exchange was listed at less than $9 per share, down from a high of $34 in March.
The combination of Mitel Semiconductor's location in Canada and its association with the parent's communication systems business has kept the semiconductor operation from most observers' attention, even though "there's a bunch of hidden treasures within the company that most people are unaware exist," said Mark Grossman, an analyst at SG Cowen Securities Corp., Boston.
"They have some interesting and attractive products," he said. "Their Vertical Cavity Surface Emitting Laser Diode technology is leading-edge. That's a market that is going to grow rapidly in the next few years.
"When you consider the valuations of some optoelectronics companies, even though they have virtually no revenue today, Mitel could probably split that opto business out alone and have it account for a valuation equal to what the whole company is worth right now," Grossman said.
Mitel Semiconductor needed to split from the systems business, and should pare some legacy semiconductor businesses that have slowed growth potential, according to Grossman.
Analysts compared Mitel's move to Lucent Technologies' planned spinoff of its microelectronics business.
"The industry trend is obviously in that direction," said Bob Merritt, an analyst at Semico Research Corp. in Redwood City, Calif. "Mitel [Semiconductor] has its products targeted at a good place to be, and there are strong opportunities. They have the skills and they're going in the right direction. Now it's going to come back to execution."
Both Mitel's and Lucent's semiconductor efforts have suffered from an inability to get major communications-systems companies to purchase ICs from a perceived competitor, said Will Strauss, an analyst at Forward Concepts Co., Tempe, Ariz.
"This will help Mitel bring a unified message to the market," Strauss said. "They have the right talent. They have the right experience and systems know-how that beats most of their competitors."
Mitel Corp. was formed in 1973 as a provider of PBX and other communications-systems equipment. A captive semiconductor business was created in 1989, and in 1991, Mitel Semiconductor began a push into the merchant communications-IC market.
In the past five years, the semiconductor business shored up its portfolio and position in the communications-IC market via acquisitions. Mitel in 1996 acquired ABB Hafo, a medical-IC and optoelectronics company; GEC Plessey Semiconductors (wireless and set-top-box ICs) in 1998; and in July, Vertex Networks Inc. (IP routing switches and software technologies for intelligent packet-switching applications).
A turning point for the semiconductor operations came shortly after the Hafo acquisition, when Cisco Systems Inc. selected Mitel's Time Division Multiplexing (TDM) technology. That relationship marked the company's first strategic win in data communications.
Mitel Semiconductor has seen its revenue increase from $85 million in fiscal 1996 to $422 million in fiscal 2000. For the six months ended Sept. 30, the chip operation reported revenue of $378 million and an operating profit of $112 million.
"We set some objectives for this organization, and right now it's roughly a half-billion dollars in revenue [for fiscal 2001], and we want to grow to $2 billion within five years," Cordeau said.
"We still have a need to acquire some intellectual property to complete our portfolio, and we're definitely looking right now at additional acquisitions or equity investments," he said.
Mitel Semiconductor focuses on four key areas: user access, network access, medical, and custom technology.
The custom business includes foundry services Mitel began several years ago to keep acquired fabs in full production. Foundry services will account for about $53 million in revenue this fiscal year, but are expected to decrease as Mitel increases production of its own devices.
The custom effort also includes ASICs acquired from Plessey. Mitel is withdrawing from the ASIC market, although it continues to support existing customers.
The medical business, which accounts for about $33 million in annual revenue, manufactures pacemaker and hearing-aid ICs. Capitalizing on significant synergies between Mitel's medical and communications businesses will help the company grow to about $165 million annually in the next five years, Cordeau said.
Mitel sees its biggest growth opportunities in the next five years in the user- and network-access markets.
The user-access business, which includes ICs used in the connection of service subscribers to the wireline or wireless network, has a run rate of about $130 million annually, with the potential to grow 40% to 45% a year, Cordeau said.
The network-access business has a run rate of about $200 million and is expected to grow 50% annually for the next five years, according to Cordeau. Its offerings include TDM-switching products, specialized phase-lock-loop devices, physical-layer interfaces, optoelectronics, and with the acquisition of Vertex, packet-switching ICs.
Among Mitel's product-development targets in the next 18 months are parallel-fiber modules and switch fabric, VDSL, Bluetooth, and ATM-adaptation layer 2 (AAL2) ICs.
Mitel is concentrating on the voice-over-packet market, and has introduced the MT1020A baseband chip, which integrates a Bluetooth link controller; codec; queue manager; 8 Kbytes of RAM; and audio, host, and bus interfaces with an ARM7-based microprocessor with support peripherals.
The MT1020A is manufactured on a 0.35-micron process, and Mitel plans in the first quarter of 2001 to introduce a 0.18-micron version.
The baseband chip must be used with an existing third-party radio chip. By the third quarter of next year, Mitel plans to add the 0.18-micron MT1010 radio chip to form a two-chip Bluetooth solution. By early 2002, Mitel targets an integrated baseband and radio chip, the MT1030.
A key to success in the increasingly competitive Bluetooth market will be cost competitiveness. The MT1020A is currently $10 to $12, and within three to four years, Mitel expects to bring the MT1030 down to $5.
In the digital subscriber line (DSL) market, Mitel is concentrating on VDSL, which provides the highest potential transmission rates of up to 22 Mbits/s in short- loop networks of about 3,000 feet.
VDSL may prove to be the "universal" DSL flavor due to its flexibility in providing symmetrical and asymmetrical service at bandwidths between 6.4 and 22 Mbits/s that will find application in both consumer and business markets, said Mark Wirth, DSL program product line manager.
Mitel plans to offer both full-rate and lite VDSL solutions, Wirth said. The VDSL-lite will provide rates scalable from 32 Kbits/s to 6.4 Mbits/s. Samples of the full and lite versions are expected next year, with production scheduled for 2002.
In optoelectronics, Mitel has completed alpha tests of its 30-Gbit/s parallel-fiber module, has beta testing ongoing, and plans for production early next year, said Olaf Svenonius, optoelectronics product line manager.
The parallel-fiber modules, which are based on Mitel's VSCEL technology, are currently 12- ?? 2.5-Gbit/s solutions, and have a road map to 640 Gbits/s in a 16- ?? 40-Gbit/s solution by 2004, Svenonius said. The module business could be worth as much as $165 million next year, and grow to $1.4 billion by 2005, he said.
Mitel's MT90502 AAL2 SAR chip is sampling with production scheduled for March 2001, said Louise Gaulin, voice-over-ATM product line manager. The solution will enable the ATM network to transport both voice and data traffic into specific payloads.
The AAL2 ICs will become increasingly important in access-infrastructure equipment with the growth of DSL and 3G systems requiring increased voice, data, and video demands, she said.