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Broadcom to Buy Chip Maker SiByte for $2 Billion in Stock

Semiconductors: The deal would be the Irvine firm's 11th purchase this year and give it an edge in the high-tech market.


Spending top dollar for new technologies and scarce engineering brain power, Broadcom Corp. said Monday it will buy a Santa Clara chip maker for $2.04 billion in stock--the most expensive acquisition in its long buying spree.

Broadcom, already a leading maker of communications semiconductors, said the purchase of closely held SiByte Inc. will expand its line of chips for larger telecommunications networks.

But as much as SiByte's upcoming products may give Broadcom an edge in a fast-growing high-tech market, the company's 11th acquisition this year also represents a big investment in a key asset all technology companies seek: engineers.

SiByte's founders, Dan Dobberpuhl, Amarjit Gill and Leo Joseph, are all from the former Digital Equipment Corp. Dobberpuhl, SiByte's chief executive, was responsible for the world's fastest and most power-efficient commercial microprocessors, said Henry T. Nicholas III, Broadcom's chairman.

The $2-billion purchase price for SiByte might seem steep, said Ashok Kumar, an analyst at U.S. Bancorp Piper Jaffray, "but for the quality of the road map and the team they are getting, they had to step up to the plate.

"That's the hallmark of Broadcom. They tend to overpay, but they also tend to pick the best talent out there."

Engineering talent is so valued that deals are sometimes measured facetiously by their cost per engineer. Broadcom would be paying $18 million for each of SiByte's 113 engineers, but that is not out of sorts in the industry. Nortel Networks Corp.'s $3.2-billion purchase of Xros Inc. in Sunnyvale earlier this year amounted to about $36 million per engineer.

Companies are forced to pay top dollar for highly skilled technicians "when there's a shortage of this kind of talent," Broadcom co-founder Henry Samueli said in a presentation last month at the UC Irvine engineering school that bears his name.

Samueli has given $20 million and $30 million, respectively, to the UCI and UCLA engineering schools. He did so, in part, he said, to increase the number of engineering graduates the universities generate.

"It is an investment, not a gift," Samueli said at the UCI event. "Like any other investment I would make, I expect a return on that investment."

Broadcom will trade as much as 9.3 million shares of its Class A common stock for SiByte. About 5.6 million shares will be issued when the deal closes, probably by the end of the year. It expects to issue about 3.7 million more shares when certain performance goals are met. An additional 1.8 million shares could be issued to SiByte customers who hold outstanding performance-based warrants.

SiByte's engineers, most of whom have graduate degrees, are developing a high-performance chip that directs data traffic over the Internet.

1st Multiprocessor on a Single Chip

It would likely be the industry's first network multiprocessor on a single chip and would combine two data-processing engines on the same semiconductor, increasing efficiency and saving time.

Nicholas said SiByte will complement the technologies Broadcom gained with other recent acquisitions. And Kumar called the transaction "a great fit for Broadcom."

Wall Street traders barely reacted to the deal. Broadcom stock lost $3.38 in Nasdaq trading Monday to close at $219 a share.

"Broadcom has acquired a lot of really cool stuff," said market analyst Charles Glavin of Credit Suisse First Boston. The question now, he said, is integrating those technologies together in a cohesive product line.

"They've got the currency to keep buying companies, and they're using it," Glavin said. "The real trick is going forward at this point."

Nicholas said that SiByte has commitments from its customers to buy more than 1.3 million of its upcoming chips for an average selling price of several hundred dollars apiece. However, SiByte is not even expected to provide samples of that product until the first three months of next year.

Meanwhile, the deal is expected to cause Broadcom's earnings to drop by 3 cents a share for each of the next three to four quarters, Nicholas said. The acquisition is not expected to add to Broadcom's profits until the beginning of 2002.

"That's almost 10% of their earnings, but their stock didn't go down 10%," said Rick Billy, a semiconductor analyst at SG Cowen Securities Corp.

"People will continue to give them the benefit of the doubt. The market will tolerate anything, until Broadcom disappoints or throws off some clearly negative vibrations, which they're clearly not doing," he said.

Meanwhile, ATI Technologies Inc. in Toronto said Monday that it has an 11% equity stake in SiByte. Its shares rose 7.72% in Nasdaq trading to close at $9.38 per share Monday.


Broadcom's Biggest Buy

Broadcom Corp. continues to buy companies that expand its presence throughout the network structure. It has acquired 11 companies this year.

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