Irvine's Broadcom Acquires 2nd Tech Firm This Week

By P.J. HUFFSTUTTER and ROBIN FIELDS

March 2, 2000 12 AM PT

TIMES STAFF WRITERS

As part of its bid to become the region’s preeminent high-tech company, Broadcom Corp. added to its record growth Wednesday with the planned purchase of its eighth company in a little more than a year.

Using its skyrocketing shares as currency, the Irvine chip developer, already the fastest-growing chip maker ever, said it planned to buy Stellar Semiconductor Inc. in San Jose for an estimated $180 million in stock. It was the company’s second purchase this week, and came after an elaborate courtship that has come to mark Broadcom’s aggressive style.

In pursuing a strategy of growth through acquisitions, Broadcom is following a well-worn path blazed by such high-tech giants as Cisco Systems Inc., the world’s second-most valuable company after Microsoft Corp.

Though Broadcom’s sales are far smaller than Cisco and chip rival Intel Corp., the Orange County company dominates a hot high-speed communications market driven by consumers’ ravenous appetites for new products.

The ultimate goal of these companies is to meld cable-television systems and computer networks to offer interactive services, like Internet access and telephone connections.

Broadcom bought an Atlanta software firm, Digital Furnace Corp., this week for about $136 million in stock, bringing the tally of its shopping spree to more than $1.2 billion.

“You can either develop your technology in-house or buy it from someone else,” said Mike Paxton, an analyst with the research firm Cahners In-Stat Inc.

“Right now, everything is about getting your product out on the market and being the first one there. Acquisition, even with some of the problems that go along with it, is a faster way to go,” Paxton said. “And for Broadcom, it’s a smart strategy.”

Details of Broadcom’s latest transaction were released well after the stock market closed. Even so Broadcom gained $8.63 a share Wednesday to close at $206. The price gives the company an overall value of $42.9 billion, making it one of Southern California’s highest-valued technology firms.

“We’ve walked away from [buying] companies based on their culture and size,” said Henry T. Nicholas III, Broadcom’s chief executive. “We have a fast-paced culture. We want people who are off-the-scales brilliant and who can fit in with us. It’s a very tough combination.”

Stellar creates technology that makes interactive television and Internet content more attractive. It reduces the amount of information needed to create digital images and graphics over the Net, yet keeps the quality of these images high.

Stellar’s technology, which is already being incorporated into a Broadcom chip, is designed to boost the quality of such services as movies-on-demand, Web browsing and online computer games.

The technology also would be added to the Irvine company’s chips for interactive set-top boxes, high-definition television sets and, eventually, hand-held Internet devices, officials said.

“We figured that we could bring good eye-candy to consumers through millions of Internet devices, and do it in an inexpensive way,” said Sandeep Gupta, Stellar’s chief executive. “We’ve been working with Broadcom for more than a year.”

The deal is expected to close by month’s end. By then, Stellar will be rolled into Broadcom’s digital video research group in San Jose. Gupta will continue to oversee his team of 30 employees, most of whom are engineers.

All of the businesses that Broadcom has bought, regardless of what they make, share similar traits. All are small, usually 50 employees or fewer. All have staffs that are dominated by engineers, not sales or marketing people. Each has a product that is about to be released or will be launched within six to nine months.

What’s more, say analysts, all are flourishing outside the radar of Broadcom’s larger rivals.

“They’re making the right choices,” said Mike Wolf, senior analyst for Cahners. “Somehow, Broadcom spots them before they go public and before anyone else [notices them].”

And during its buying spree, Broadcom has refined its courtship process, almost to an art.

Typically, it sends a team of engineers led by co-founder and Chief Technical Officer Henry Samueli to scout a company, learning as much as possible about the staff and the technology being developed.

By all accounts, Samueli, currently on indefinite leave from his position as a UCLA lecturer, inspires engineers as a confidant and peer.

“I met [Samueli] and found myself trying to impress him,” said Jeff Thermond, president of Epigram Inc., a high-tech company in Northern California that Broadcom bought last April. “Everything came spilling out.”

If the company seems to be a good fit, Nicholas is sent in to seal the deal quickly--as Thermond learned.

Nicholas, the gregarious and imposing 6-foot-7 leader known for his driving ambition, called Thermond only days after Samueli visited Epigram’s offices in Sunnyvale. It was 10:30 p.m. and Thermond was home, putting his young daughter to bed.

“Nick’s still in the office and he’s ready to close the deal,” Thermond said. “I didn’t put the phone down until after midnight.”

Nicholas’ enthusiasm for the merger, said Thermond, was infectious. “He was so filled with energy, that I went out and ran up Heart Attack Road [a favorite jogging area] for two hours just to calm down,” Thermond said.

High-tech mergers, whether small like Broadcom-Stellar or enormous like the America Online-Time-Warner deal, reflect the industry’s hunger for new developments and the constant pressure to remain on the cutting edge.

Cisco, long considered Silicon Valley’s king of mergers, gobbled up 21 companies in the last year and expects to swallow as many as 25 more this year. But its aggressiveness in buying firms is matched by its skill at making them pan out, analysts said.

The company picks the right targets, often buying stakes in start-ups to get an early peek at promising technologies, then pounces when the ideas come closer to fruition. Cisco also has become expert at making newcomers feel welcome, making management and administrative changes as wrinkle-free as possible.

“Cisco and Broadcom have very similar acquisition strategies,” said Greg Sheppard, who tracks the semiconductor market at research firm Dataquest.

“Like Cisco, Broadcom tends to buy smaller companies with staffs of 100 people or less. It’s easier with these smaller companies to move fast, bring them in and do more to keep them happy.”

Moving fast is imperative, say analysts, as the race to control the key elements of this computer-networked future is just beginning.

So far, Broadcom is in the lead and topped $500 million in annual sales in only its second year as a public company, a first among chip companies.

But competition is growing--both for market share and for finding companies to buy.

“The need for intellectual property is increasing exponentially and if you try to do it internally you’ll be beat to market by a more nimble competitor,” said Mark Edelstone, an analyst at Morgan Stanley Dean Witter.

Intel, with annual sales that are more than 50 times larger than Broadcom’s, spent more than $6 billion in the last 12 months to buy 14 companies in the networking and communications industry.

As a result, Intel has become a formidable rival, say analysts.

So has Conexant Systems Inc., the Newport Beach chip maker that was spun off by Rockwell International Corp. in 1998. Conexant bought two companies in December, but says it relies less on buying other firms to grow than it does on creating new products in-house.

Conexant did pay almost $1 billion for its most significant purchase, Maker Communications Inc., a Massachusetts networking technology firm.

But unlike some of Broadcom’s targets, Maker already had products out on the market, said Conexant company spokesman Tom Stites.

“It’s better [for us] to go for someone who’s there than someone who’s almost there,” Stites said.

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

Rapid Expansion

Broadcom’s sales have more than quadrupled since it began a series of acquisitions early last year. Its stock, which traded in the $30-$45 range early last year, closed at $206 a share on Wednesday.

Quarterly Sales (In millions of dollars with companies acquired along the way:

2nd qtr. 1998: $35.54 million

1999

1st qtr.

Date: Jan. 25

Acquired: Maverick Networks

2nd qtr.

Date: April 25

Acquired: Epigram Inc.

3rd qtr.

Date: June 1

Acquired: Armedia