Conexant Pays Steep $1 Billion for Maker Communications

In a deal that raised eyebrows for its price tag even in the high-tech world, Newport Beach-based Conexant Systems Inc. said Monday that it acquired a small Massachusetts networking technology firm for nearly $1 billion in stock.

The purchase of Maker Communications Inc., which has 85 employees and had sales of $13.6 million in the last year, is the first significant acquisition for Conexant and fills a hole in the company’s lineup of chips for telecommunications networking.

But it comes at a steep price.

“It is a premium valuation,” acknowledged Dwight Decker, Conexant’s chairman and chief executive. “We believe it is justified by the growth rate of this segment, which will be better than 100% a year for at least the next three to five years.”

Conexant officials said they can build revenue from Maker’s products, which manage traffic within and among networks, to $100 million a year by the end of 2001. Industry experts said the segment has tremendous potential, with IDC Research forecasting the nascent market growing to $308 million by 2002.

The acquisition follows a series of high-priced deals in the networking industry, almost all of them fueled by the acquiring company’s highflying stock. The price of a company used to be determined as a multiple of its earnings or revenue. But the old rules have been tossed out the window in the fast-paced world of technology companies, in which many have no earnings. Among the new measurements: cost-per-engineer.

“You’re getting ahold of their intellectual property and their engineers,” said Mike Paxton, an analyst with Cahners In-Stat Inc. “When you go after the people, you’re also getting their business development people and marketing people who have already established relationships.”

With Maker’s approximately 85 employees, about 70 of whom are engineers, Conexant, which was spun off from Rockwell International Corp. at the beginning of this year, paid more than $11 million per employee.

On Monday, Cisco Systems Inc. said it would buy the optical systems business of Pirelli of Milan, Italy, for $2.15 billion in stock. The optical systems division this year had revenue of about $225 million.

Cisco last month completed its largest deal ever, a $6.9-billion stock purchase of Cerent Corp., which lost $29.3 million on nearly $10 million in sales during the first half of 1999. Cerent, with its 287 employees, went for about $24 million per employee.

Also last month, Intel Corp., a Conexant rival in networking chips, completed its $1.6-billion cash buyout of DSP Communications, which had revenue of $119 million in the first nine months of this year.

Industry analysts agreed that Maker’s technology was a good fit with Conexant.

“I don’t know if the price necessarily makes sense, but in terms of the direction that they’re headed, it’s a good strategic fit,” said Kimberly Funasaki, a semiconductor research analyst for IDC Research.

The stock market expressed its concern over the deal by selling off Conexant stock, which fell $3.31, or 5%, to $66.31 in Nasdaq trading. Maker’s shares, however, soared $7.50, or 22%, to $41.75.

Maker went public in May at $13.

Under terms of the deal, Maker stockholders will receive 0.66 share of Conexant stock for each share they own. The buyout is expected to close within three months, pending regulatory and shareholder approval, and will dilute earnings by as much as a penny a share for the next three quarters, Conexant officials said.

Maker will continue to operate as it is, with all of the employees continuing after the purchase, Decker said.

For Conexant, the deal further develops the company’s network access business, which nearly doubled last fiscal year to $278 million in revenue and was the company’s fastest-growing division.

The network access division, the second-largest of Conexant’s five business segments, develops products that enable the transportation of voice, data and video among and within networks. Conexant had earlier said that it planned to grow through acquisitions and that it would focus particularly on the network access industry.

Decker said that it would have taken as long as 2 1/2 years to develop, manufacture and market the same technology that Maker is already selling.