Facing Sober Reality at Once-Soaring Broadcom
Half a dozen gleaming Lamborghinis are usually parked near the doors of Broadcom Corp.’s headquarters in Irvine, proud totems to the company’s mythic rise and its seemingly indestructible stock price.
These days the flamboyant cars are also subtle reminders of how much has slipped away. After it catapulted nearly overnight to become Southern California’s most valuable tech company last summer, shares of the fast-growing communications chip maker hemorrhaged more than half of their value last month.
Analysts say Broadcom’s long-term business prospects remain promising. But a humbling reality has crept into one of the region’s most spectacular success stories and into the lives of its 2,000 workers.
The stock that weathered the big market sell-off in March and soared to $273.63 a share by late August hit its 52-week low of $84.56 during trading on Nasdaq last week. Bargain hunters pushed the stock up $7.25 Friday to close at $104.75.
Newer employees, who arrived in the last year and now make up more than half the company’s work force, have seen the stock price plunge below the value of their coveted stock options, rendering the options worthless for the time being. Options are a major part of their pay packages.
Many have faced this recent plot twist with steely confidence. “If we just keep working hard, the stock will climb back up,” they repeat to themselves and their families, to strangers and one another other.
With varying degrees of conviction, that mantra is coming from cubicles at technology companies everywhere, a great many of which are smarting from the recent beatings their sector has taken on Wall Street.
It has been a brutal month for the tech-heavy Nasdaq, which last week traded at its lowest levels in 15 months and is on pace for the worst annual performance in its 29-year history.
Computer stocks such as Intel Corp., Gateway Inc. and Dell Computer Corp. are having a bloody season, as are the communications chips makers that compete with Broadcom. Its Newport Beach rival, Conexant Systems Inc., has slumped more than 80% in the last nine months from its yearly high of $124.42 in February to $21.44 a share Friday.
What makes Broadcom’s recent fall so jarring is how resilient its share price had been. Its meteoric rise, as rival communications companies stumbled, marked it as the proud exception in the brutal pounding on Nasdaq.
Exuberant analysts heaped praise on the company, hard pressed to find anything to criticize. Now, many of them are pulling back on optimistic predictions, such as a forecast that the stock would reach as high as $300 a share. But they are upbeat about Broadcom’s long-term prospects.
“It definitely hurts the mood,” said one Broadcom engineer searching for optimism. “But the people at Broadcom are smart enough to realize that in the long run, the general price of the stock is going to go up or down, depending in part on how well we do in our jobs and in the market. We do have some ability to impact that.”
Employees are frustrated but determined not to let the mercurial stock market distract them from a business mission they describe with unflinching zeal, according to eight workers, from managers to rank-and-file engineers.
But they admit that sometimes they just can’t take their eyes off the stock tickers on their computer monitors. All of them spoke on the condition that they would not be identified. Broadcom policy prohibits them from commenting publicly on the company or its share price without permission.
“It’s really strange,” said one worker who joined Broadcom this year. “Everyone’s just kind of scratching their heads. . . . We all completely believe in what we’re doing, and we feel what’s happening to us is coming from outside forces.”
Indeed, the bleeding began when Cisco Systems Inc., Broadcom’s second-biggest customer, said it would cut back on orders in the next quarter or two to reduce its growing inventory. Analysts saw other companies with high inventories and began cutting back on their projections and downgrading their recommendations.
Broadcom’s chief executive, Henry T. Nicholas III, said he considers the company’s stock plunge a “market correction” that is part of “an overall market decline.”
Nonetheless, Nicholas changed his schedule Wednesday, a day after the company’s stock hit its low point, to fly to a conference in Arizona hosted by Credit Suisse First Boston to reassure analysts and institutional investors.
Nicholas said Thursday night that he thinks company morale is tied closely to Broadcom’s technological feats, not its value to shareholders.
“People just don’t understand this,” he said. “When it comes to the level of stress we’re under and our moods being up and down, the stock price has an influence, but I’d say it’s much more highly correlated to the competitive bake-offs with our customers. Our heads are not in the year 2000. Mentally, we’re living for the year 2002 right now.”
At Broadcom, wealth is not something people talk about so much as something they have learned to live with. When a shiny new Mercedes pulls into the parking lot, no one knows who will emerge from behind its tinted windows--an executive or just another engineer whose stock options recently vested, said one newcomer, who confesses that he tries not to gawk.
The wealthiest Broadcom employees are those who joined before the company went public. In Broadcom lingo, those folks are “on the mug,” meaning their names appear on the commemorative coffee cup that marks the company’s stellar initial public offering two years ago. If you’re on the mug, it goes without saying that you’re rich even by Broadcom standards.
Newer employees can’t do much with their stock options now. As in many tech companies, the cost that employees must pay when they exercise their options is based on a 30-day average of the share price around the time the employee was hired. Those with options vesting now would probably have to pay more for the stock than its worth on the market. They would probably choose to hold onto their options instead, hoping the price soars again.
In today’s hotly competitive market for engineering talent, analysts say that Broadcom’s biggest danger may be the chance that its lower stock price could lead some workers to search for more lucrative opportunities.
But Nicholas boasts that his senior staff is dedicated. He estimates that most of the 10 managers who report directly to him are worth more than $50 million, but their brutal working hours continue.
“They won’t spend that much money before they die,” Nicholas said. “If their motivation was based on money, they would already be gone. These guys never have to work again, so why do they show up for midnight staff meetings?”
However, since the majority of Broadcom’s employees these days are new--the ranks have more than doubled through hiring and a dozen acquisitions this year--they are not raking in millions from options. They joined while the stock price was flying high.
A sudden wealth readjustment could quickly affect employees’ spending habits, but the math-oriented engineers tend to be conservative and methodical about their personal finances, said Chris Moore, an Irvine real estate agent who caters to Broadcom employees.
“They’re a very savvy group of people, and I think they all have planned for drops in the market,” Moore said.
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Shifting Fortunes
Broadcom Corp. shares soared so high that the chip maker became Southern California’s most valuable high-tech company three months ago. But November’s shelling knocked out about half its value. A ranking of the firms then and now:
Rankings
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Now Then Company Fri. market value, in billions 1 2 Qualcomm $62.1 2 1 Broadcom 24.7 3 3 Applied Micro Circuits 15.6 4 6 Computer Sciences 12.0 5 5 Vitesse Semiconductor 8.8
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Broadcom Stock
Monthly closes and latest on Nasdaq:
Friday: $104.75, up $7.25
Sources: Market Guide, Bloomberg News
