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Broadcom Expanding Again With Deal for NewPort Communications

Hardware: Analysts call $1.3-billion acquisition of neighboring Irvine chip firm a key strategic move.

August 15, 2000|KAREN ALEXANDER | TIMES STAFF WRITER

In its third acquisition in as many weeks, Broadcom Corp. took another step Monday to expand into the fast-growing fiber-optic communications market, announcing a $1.3-billion acquisition of a neighboring Irvine company called NewPort Communications Inc.

Privately held NewPort, a 4-year-old firm founded by engineers from Broadcom rival Conexant Systems Inc., designs chips that send information on fiber-optic networks. The 74-employee firm has yet to show a profit, but comes with a high-profile roster of major customers, including Cisco Systems Inc., Lucent Technologies Inc. and Sumitomo Electric Industries Ltd., which were also investors in NewPort.

Besides Conexant, NewPort's rivals include Vitesse Semiconductor Corp. in Camarillo and Applied Micro Circuits Corp. in San Diego.

Broadcom, the dominant chip maker for broadband, or high-speed communications over standard copper wires, said it would buy NewPort by issuing 5.5 million shares for all NewPort's stock.

It would be Broadcom's 13th acquisition in the last two years. Although the latest purchase is expected to dampen Broadcom's future income a bit--diluting earnings by about a penny a quarter for three quarters--analysts hailed it as a key strategic move.

The news propelled Broadcom's stock up $15.69, or 7%, to $240.75 in Nasdaq trading. The stock is up 76% from the start of the year.

"This could be one of the best acquisitions we've seen the company do," said Morgan Stanley Dean Witter analyst Mark Edelstone. "It will materially enhance the effort they have put forth in optical networking."

The acquisition gives Broadcom new reach in the fast-growing market for chips used with lasers in fiber-optic equipment. The deal is expected to close within 60 days.

Broadcom made its entrance into the fiber-optics market in May, and its $1.2-billion purchase of Silicon Spice Inc., announced last week, has expanded the company's portfolio of products used in building wide-area networks. These networks, which allow information to be exchanged over great distances, rather than within an individual company or home network, are the backbone of the Internet.

The market for wide-area network equipment will amount to $32 billion this year and could reach $49 billion next year, according to the Dell'Oro Group market research firm.

Jim Liang, an analyst at WR Hambrecht & Co. in San Francisco, said the deal is complementary for Broadcom because NewPort is a leading developer of technology based on chips made of low-cost silicon, which has also been Broadcom's focus.

Broadcom's aggressive string of acquisitions has drawn comparisons with Cisco, the world's largest maker of computer-networking equipment that increased its value and market share by devouring dozens of smaller companies with promising technology in the networking equipment marketplace.

Although acquisitions can result in stock declines for the buyer because of concerns about near-term dilutions on earnings, Broadcom's purchases have generally sparked a stock rally, a sign that investors see the acquisitions as strengthening or broadening the company's businesses.

Said Liang: "One of the reasons we are optimistic about the Broadcom story is we believe the ability to strategically acquire and integrate key technology companies is . . . the hallmark of a preeminent technology company."

Broadcom and NewPort are based across the street from each other, and do work in the same chip plant. NewPort was founded by former Conexant engineers Armond Hairapetian and Lorenzo Longo. Broadcom's chief executive, Henry Nicholas III, said he failed to recruit Hairapetian, now chairman and chief executive of NewPort, as Broadcom's 15th employee.

"He accepted the offer, slept on it and changed his mind. He said, 'My dream is to do what you and Henry [Samueli] have done. I want to start my own company,' " Nicholas said. Samueli is co-founder and chief technology officer of Broadcom.

Nicholas said he consulted extensively with Longo and Hairapetian over the years, offering business and strategic advice.

Now NewPort's 74 employees will join between 50 and 75 at Broadcom working on products for optical networks.

Speaking on a conference call, Nicholas said he wants to assemble a set of chips to run every kind of device used in communications networks, from cable modems in the home to powerful switches that direct huge volumes of data traffic.

Nicholas declined to forecast sales for NewPort's chips, saying the market for such products will be $1.3 billion next year. Broadcom said the chips could be used in eight types of devices, from equipment that boosts the capacity of optical networks to high-capacity data-traffic routers to products that test fiber-optic networks.

Nicholas said he watched NewPort for three years and decided to acquire the company once it developed chips to send information at 10 gigabits a second, the fastest speed used in fiber optics. He plans to combine technologies from Silicon Spice and NewPort to develop new semiconductors that process and transmit data, functions that now require separate chips.

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Bloomberg News was used in compiling this report.

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