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Nasdaq Hits 13-Month Low; Broadcom Shrugs Off Stock Plunge

Technology: The Irvine firm, downplaying its share-price drop, announces plan to acquire Israeli chip maker for $677 million in stock.

November 29, 2000|KAREN ALEXANDER and ROBIN FIELDS | TIMES STAFF WRITERS

Broadcom Corp. said Tuesday that it will acquire an Israeli company that makes chips for digital video recording. But the news of the $677-million stock deal--the Irvine company's 12th purchase of the year--did not halt its precipitous fall on Wall Street and raised questions among analysts about the company's ability to sustain its aggressive expansion.

Broadcom's stock tumbled another $12.50 Tuesday to close at a 52-week low of $85.06. In just the last month, Broadcom's shares have lost more than half their value, erasing almost $5 billion each for co-founders Henry T. Nicholas III and Henry Samueli, recently named the two richest men in Southern California.

In an interview, Nicholas, who is Broadcom's chief executive, downplayed the stock's dramatic decline, saying that the communications chip maker's prospects were as strong as ever and that it would not stop its campaign to add brain power and products. He cited Tuesday's plan to purchase privately held VisionTech as proof that Broadcom would retain its appeal as a suitor.

"This happened in the face of a severe decline in our stock," he said.

Still, analysts questioned whether Broadcom could continue its shopping spree, and it was clear that Nicholas and VisionTech's chief executive, Amir Morad, were frustrated with the pounding of Broadcom's stock, triggered earlier in the month after Cisco Systems Inc., a major Broadcom customer, said it would cut back orders.

"Don't you hate it? I hate it," said Morad of the stock meltdown of Broadcom and other tech issues.

But Morad maintained that he had no seller's remorse; Broadcom's technology, management and culture make the company the right match for VisionTech, he said.

Broadcom's plan to buy VisionTech, based in Herzliya, Israel, drew praise from analysts. It is "a strategic fit with Broadcom's technology portfolio," said Jim Liang of WR Hambrecht.

The deal, expected to close in 60 days, marks Broadcom's entrance into the fast-growing market for personal digital video recording technology. VisionTech's chips are used by television set-top-box manufacturers, including Motorola Broadband Communications Sector, Scientific-Atlanta, Pace and personal video recorder company ReplayTV. The technology can be used to freeze live TV programs, replay or rewind programs in progress, and can be programmed to remember viewers' preferences and record similar shows.

Broadcom, a leading maker of chips that enable high-speed transmission of information on cable modems or set-top boxes, would issue 7.96 million Class A shares for VisionTech. Broadcom said the purchase will cut about a penny per share off its earnings in the first two quarters of next year, but will become profitable in the third quarter.

Liang, who had downgraded Broadcom's stock earlier this month, predicted that the outlook for Broadcom would remain volatile.

For much of the year, Broadcom's stock seemed to defy the tech slowdown, reaching a high of $273.63 in August.

This month, Broadcom bought rival SiByte Inc. in Santa Clara, Calif., for what then was about $2 billion in stock. Calculated at Tuesday's closing price, the value of that deal has shrunk to $791 million.

Broadcom's stock woes aren't expected to derail that deal, and SiByte co-founder Leo Joseph said he had no regrets about selling to Broadcom without putting a stock price guarantee in the contract.

Joseph said he remains convinced he made the right move long term.

"Who do you want as a dance partner two or three years down the line?" he said. "We think it's Broadcom."

But future purchases by Broadcom figure to be harder. "It makes acquisitions more expensive and more dilutive," noted Jeffrey Lipton, an analyst with Chase H&Q.

Nicholas disagreed. Others said it cuts both ways.

"If the share is very highly valued, it's easier to use the stock to make an acquisition," Liang said. "That being said, some companies may be hesitant to sell to a company with highflying stock because if it goes down, it can reduce the acquisition value. If you have a stock that's already been corrected, then six months to a year later you are going to be able to realize the value that you got."

The low price also could affect Broadcom's recruiting ability.

An employee from one competing company, who has watched some colleagues leave for Broadcom while the shares were flying high, wondered what those people are thinking now that the stock has plunged well below the price for their stock options.

"If you asked me if I'd prefer to join a company like Broadcom at $240 a share or $80 a share, the choice is easy," said the employee, who asked not to be identified. "They're a great company and they've got great technology. I'd want to get in while the options price was low."

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Broadcom's Round-Trip

Shares of semiconductor maker Broadcom have plunged to their lowest level in a year, continuing what has been a wild ride in 2000.

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Monthly closes and latest for Broadcom (BRCM) on Nasdaq

Tuesday: $85.06, down $12.50

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Source: Bloomberg News

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