Conexant to Acquire San Jose Tech Firm

Making its fourth acquisition in seven months, high-speed communications chip maker Conexant Systems Inc. said Tuesday it will buy a privately held technology developer in San Jose in a stock swap worth about $394 million.

The acquisition of HotRail Inc., which is expected to close this week, will add to the product line of a company that is already one of the biggest players in the market for communications-equipment chips.

HotRail’s products--switching and transceiver components--are aimed at speeding the transmission of data through computer networks.

With the new technology, Newport Beach-based Conexant gains the potential to provide customers like Lucent Technologies Inc., Nortel Networks Corp. and Cisco Systems Inc. with the components for processing data traffic over the Internet--equipment that receives the information, processes it and sends it on its way.

“This is a major step, and this is what major semiconductor makers in the networking space are attempting to do,” said Dwight Decker, Conexant’s chairman.

Conexant will trade 7.8 million shares for HotRail. The transaction was announced after the stock markets closed Tuesday. Conexant shares dropped $2.75 on Tuesday, or 5.2%, to close at $50.56 a share.

Bala Iyer, Conexant’s chief financial officer, said in a conference call that the purchase is expected to hurt Conexant’s earnings for about 18 months.

No layoffs are expected at the 55-employee HotRail, which has yet to bring a product to market or turn a profit.

Decker said he expects to see revenue of $10 million to $20 million from the purchase in the next fiscal year, which begins Oct. 1.

Mark Edelstone, an analyst for Morgan Stanley Dean Witter, praised the deal.

“This is really the one piece of the networking puzzle that Conexant hasn’t had. This is very positive for them,” Edelstone said.

The company will issue new shares amounting to 4% of its stock outstanding to pay for the acquisition. Conexant’s share price will be diluted by about a nickel a share.

“It’s a modest price to pay for a solution that really adds a lot,” Edelstone said.

This is Conexant’s second addition to its networking business unit.

The company made a major investment in networking infrastructure with its acquisition of the Massachusetts networking-firm Maker Communications, in a stock swap that was valued at nearly $1 billion when it was first announced in December. Maker’s network processors manage traffic within and among networks.

HotRail will provide the company with a claim to what is known as switching fabric, the components that receive data traffic from the processors and send it along to the proper destination.

Of HotRail’s work force, 45 are technical workers and engineers. The company will stay in San Jose but become part of Conexant’s broadband inter-networking access unit.

Conexant’s networking business grew by 90% in its last fiscal year, and Iyer said he expects the growth will continue at the same pace this year.