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Intel to Buy Xircom for $748 Million in Cash

Computers: Purchase of the maker of communications devices for laptops and hand-helds could start a series of tech acquisitions.


In its first major Southern California acquisition, computer chip giant Intel Corp. said Monday that it will pay $748 million for Thousand Oaks-based Xircom Inc., a maker of notebook computer communications devices.

The deal could set off a wave of bargain hunting for beaten-down tech companies, whose values remain deeply depressed from their highs of last winter, analysts said.

Intel will pay a $25 a share in cash for Xircom, a move that will complement the Santa Clara, Calif., company's line of desktop computer components. Intel already owns 6% of the company.

The deal represents a 38% premium to Xircom's Friday closing price of $18.06. Yet Intel is paying only a third of the $75 a share Xircom was worth in December 1999 near the peak of the technology bubble.

For the Record
Los Angeles Times Tuesday January 23, 2001 Home Edition Business Part C Page 3 Financial Desk 1 inches; 33 words Type of Material: Correction
Xircom Deal--Xircom Inc. Chairman Dirk Gates holds an MBA from Pepperdine University's Graziadio School of Business and Management. The Times misstated Gates' academic status in a story on the sale of Xircom to Intel Corp. Jan. 16.

"We are going to see a lot more mergers and acquisitions this year," said William Becklean, an analyst with SunTrust Equitable Securities in Boston. "A lot of companies like Xircom will find that going it alone is getting harder and harder, and they will be bought at attractive prices."

Xircom, with annual sales of just under $500 million, has 1,900 employees worldwide, about 400 of whom are based in Thousand Oaks.

Separately, Xircom reported Monday that its earnings plunged to just $200,000 for the quarter ended Dec. 31 from $15.3 million in the same period a year earlier. The results excluded some expenses related to an acquisition. Sales dipped 3% to $120.1 million from $124.1 million in the same period the year before.

The company's profit amounted to 1 cent per share, far below Wall Street's expectation of 14 cents.

Xircom's earnings collapsed because it is caught in a difficult transition affecting its card-like devices that allow a portable computer to plug into phones and office networks. The industry is moving toward building the equipment into computers, said Christopher Stix, an analyst with Morgan Stanley Dean Witter in Boston.

During a conference call Monday with Xircom and Intel executives, several investors and analysts questioned the timing of the deal's announcement on the Martin Luther King Day holiday, when U.S. financial markets are closed. Several asked whether the earnings surprise had prompted the companies to announce the acquisition on a financial holiday.

Dirk Gates, Xircom's chairman and chief executive, declined to discuss the timing except to say that the deal had been in the works for several months.

But several analysts and investors postulated that Xircom's deteriorating profit pushed the companies to rush the announcement. Xircom, they said, probably was worried about potential lawsuits from shareholders angry that it missed earnings targets by such a wide margin.

They also said Intel would have faced criticism over the purchase price if Xircom shares had crashed amid the earnings report absent the acquisition news.

"This is a great endgame for Xircom shareholders and a good acquisition for Intel," Becklean said.

Despite its decline in profit, Xircom continues to hold important technology in communications and network connection devices for notebook and hand-held computers, Becklean said.

Such communications devices are tricky because they must be smaller and operate on less power than similar equipment in a desktop computer.

At one point, Xircom controlled roughly 40% of the market for communications devices shaped like credit cards. Though the technology also works for similar devices embedded in portable computers, the pricing and margins are far different.

Becklean said Xircom once commanded about $195 for its cards, with a profit margin above 50%. The internal devices sell for about $75 and have a profit margin of 35%.

Combining with Intel, which makes the internal parts of a computer, will help improve that margin, Stix said.

Moreover, it will help Xircom survive while it makes the jump to wireless connections, the next expected communications advance for portable computers, Becklean said.

Executives from both companies boasted of the synergy they expect from the deal.

"We believe the notebook market will be the fastest-growing part of the computer market," said Gregg Lang, general manager of Intel's Platform Network Group.

Lang said Xircom's experience with portable computers and small- scale devices will plug an important gap for Intel.

Gates said Intel's experience building computer chips will be critical to Xircom's success.

Xircom will operate as an Intel subsidiary. The executives said they don't expect layoffs.

Gates, 39, founded Xircom in 1988 to develop ways of connecting portable computers to networks. He recruited fellow students in his MBA courses to help design the company. They got the company set up, but Gates never completed the work for his degree.

Xircom paid Gates $1.1 million in salary and bonus last year. He owns 2.7% of the company, a stake worth about $20 million.


Bargain Buy?

Intel is buying Xircom for $25 a share, a 38% premium to the stock's price Friday but far below its peak of the last year.

Xircom shares (ticker symbol: XIRC), monthly closes and latest on Nasdaq

Friday: $18.06, up 6 cents


Source: Bloomberg News


Slowing Sales

Xircom said Monday that its sales in the quarter ended Dec. 31 fell to $120.1 million from $134.1 million in the Sept. 30 quarter, as the company was hit by the general slowdown in tech equipment buying.


Calendar-quarter sales at Xircom, in millions

2000 fourth quarter: $120.1 million

Source: Bloomberg News

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