Xircom Steps Up Acquisitions as Need Grows for USB Devices
Thousand Oaks businessman Dirk Gates walked into a Fry’s Electronics store recently in search of a product that would increase the number of ports on his PC. The device would enable him to connect his computer with a printer, a modem and other peripherals with ease.
It wasn’t long before Gates spotted a line of multi-port hubs manufactured by Entrega Technologies of Lake Forest.
Apparently Gates--president, chairman and chief executive of Xircom Inc. of Thousand Oaks--liked what he found. He not only purchased some merchandise, he ultimately purchased the entire Orange County company.
The acquisition is expected to be completed within the next two weeks.
Xircom manufactures PC cards and other products that allow users of portable computers to connect to corporate networks, the Internet and other large services. Gates said the Entrega line serves as a complement to Xircom’s existing products.
“Xircom’s umbrella focus has been on innovative mobile information access,” Gates said. “With Entrega, we’ve taken a step toward building a portfolio under that umbrella. Traditional notebook PCs have fewer and fewer ports built into them. Entrega offers expansion for those PCs.”
Entrega’s products are based on Universal Serial Bus (USB) technology, which allows multiple peripherals to be plugged into the same unit, rather than using different ports for printers, modems and other devices. Traditionally that requires pulling out one connecting line to make room for another.
The purchase of Entrega Technologies follows on the heals of Xircom’s acquisition of the Rex product line manufactured by New Jersey-based Franklin Electronic Publishers. That transaction was completed last week.
Small and lightweight, the Rex PC card allows laptop and desktop computer users to download and manage phone numbers and addresses, schedules, to-do lists and other personal information.
The Rex product acquisition was valued at $13.25 million. The Entrega acquisition was valued at about $23.1 million, which included an exchange of 323,905 shares of Xircom stock, at $42 per share, plus $9.5 million in assumed debt.
Gates said the combined transactions place Xircom in a solid position in the rapidly growing mobile-computer market.
“In just the core notebook [market], which is what Xircom is focused on, there’s a 20% compounded annual growth rate, and notebook communication devices are growing faster than that, maybe 25% to 30%,” he said.
“The USB port expansion [market] is in the early phase of growth,” he said. “It’s less than a $100-million industry in this calendar year but is expected to be in excess of a billion dollars by 2002--that’s tenfold growth. That’s a high growth area for us to get into, and Entrega has managed to capture a 50% market share.”
In less than two years of operation, Entrega grew to a point beyond what its small-business design could handle, said David Murray, Entrega’s vice president of product marketing.
“We hit a niche market as the market was starting to grow,” Murray said. “Now it’s going to take a lot more investments and resources. Xircom is worldwide and has a sales force that’s tremendous and will be able to do that.”
As more USB-based peripherals are manufactured and as the number of ports on notebook PCs shrink, the market is expected to expand as would the demands on Entrega. Company executives decided help was needed.
“When you’re growing you have a lot of cash-flow needs, you’re building inventory to meet unit demands of the market, and you’re expanding business throughout the U.S. and the world,” Murray said. “We are merging with someone who can do that virtually overnight. Xircom is strong in the corporate side.”
Gates said Entrega’s engineering, marketing and sales staffs will be moved to Xircom’s Thousand Oaks facility. He said the addition of Entrega products will provide valuable ammunition for Xircom’s sales force.
“Today the customers looking for USB port expansion tend to be more [individual] consumers, but very shortly it will include the small to large corporate customer as well,” Gates said. “The shrinking number of ports on notebook PCs will cause the enterprise customer to need more expansion.”
Gates has equally high hopes for the Rex PC cards, which carry 256K of memory and weigh less than 1.5 ounces.
“The Rex is the ultimate portable device--for accessing information when you’re mobile, it’s truly an unconscious-carry item,” he said. “It also happens to be a PC card product.”
Through a partnership with Massachusetts-based RSA Data Security, Gates said Xircom plans to develop a Rex line that will incorporate secure network access for the corporate enterprise market.
“We think of all this as entering adjacent markets that are high growth,” Gates said. “We spent the last two years tuning up the Xircom engine to mass produce small devices at high quantity and at low cost and market them well internationally. These two products give us a new set of target markets that we will go after in the same way.”
Gates said future acquisitions are likely.
