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Broadcom to Buy ServerWorks for $1 Billion in Stock

Chips: Acquisition would mark Irvine semiconductor maker's first purchase of a profitable, established company.

January 09, 2001|KAREN ALEXANDER | TIMES STAFF WRITER

Despite the sharp fall in its stock price, Broadcom Corp. continued its buying spree Monday, stating it would acquire a Santa Clara, Calif., company that develops chips for computer network servers and storage systems for stock worth more than $1 billion.

Marking its first purchase of a profitable, established company, the Irvine semiconductor maker said it will issue 11 million shares--the most for any of its numerous acquisitions so far--to buy ServerWorks Corp. Broadcom also could issue as many as 9 million additional shares if revenue targets are met.

"I think it's strategically a very important deal for Broadcom," said Eric Chen, a senior analyst at JP Morgan H&Q. ServerWorks could pull in about $300 million in revenue this year, he predicted.

In a tempestuous environment that has stripped two-thirds of its market value since August, Broadcom demonstrated its continuing ability to use its stock to buy new technologies, analysts said. Broadcom shares rose $6.44 Monday, or 7.4%, to $93.44 on Nasdaq on news of the deal.

"Even at today's stock price, the valuation of [Broadcom] is still rather healthy against some of the other semiconductor companies," Chen said.

The acquisition would open new markets for Broadcom with blue-chip customers such as Intel Corp., Compaq Computer Corp. and Hewlett-Packard Co.

But it also could aggravate an already tense relationship with Intel, which has a close relationship with ServerWorks, including an agreement to share key technology. Broadcom and Intel have crossed swords over intellectual property; one suit was settled last year, and a patent lawsuit that Intel filed against Broadcom over the summer is pending.

Chen said the acquisition of ServerWorks can serve as a launching pad for Broadcom to enter the market for servers, centralized computers that allow users to share information.

It also would mark Broadcom's first serious foray into the chip-to-chip communications arena. Previously, Broadcom's focus was on chips that facilitate communications between computer systems and various networks. The chips made by ServerWorks regulate the flow of data within devices, particularly as they travel in and out of Web sites and corporate networks.

Some analysts think ServerWorks Chief Executive Raju Vegesna could have held out for more.

"I think he sold too cheap," said Credit Suisse First Boston analyst Charles Glavin. "These guys have a hell of a lot of potential."

Glavin said ServerWorks could account for about 15% of the increase in Broadcom's revenue for this year. "I think that is the reason why the stock rallied the way it did. What shocked people was how much revenue these guys had."

ServerWorks would operate as a wholly owned subsidiary of Broadcom, maintaining its operations in Santa Clara, and Vegesna would become vice president and general manager of the unit.

Unlike Broadcom's previous acquisition targets, which were early-stage companies, the 6-year-old ServerWorks has been profitable for a year. ServerWorks expects $190 million in revenue for 2000. Broadcom Chief Executive Henry T. Nicholas III said the deal is expected to be profitable to Broadcom immediately, adding 2 or 3 cents a share to the company's earnings in each quarter through 2001.

ServerWorks, which has about 100 employees, is more than 90% employee-owned and has no venture capital ownership.

As a close partner with Intel, ServerWorks is developing products for the first Intel Pentium 4 servers. Intel holds warrants for about 5% of ServerWorks stock. With the deal, Broadcom would gain access to important Intel intellectual property under an agreement with ServerWorks that lasts until 2008, Broadcom confirmed.

Nicholas said Broadcom will "do everything we can" to strengthen its relationship with Intel.

"If we had such a substantially challenging relationship with Intel, this would not have been a transaction we could have executed," Nicholas said in a conference call with analysts.

Intel spokesman Chuck Malloy said the company still is evaluating what the deal means for Intel. Intel shares lost 13 cents Monday to close at $31.94 on Nasdaq.

The deal, which has been approved by the boards of both companies, is expected to close within 60 days. It still requires approval by ServerWorks stockholders. Broadcom expects to record a one-time charge in relation to the deal in its first fiscal quarter.

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