High-Speed Buying Binge Continues for Broadcom Corp.
Broadcom Corp. said Wednesday it would buy British chip maker Element 14 Inc. for about $641 million in stock, further positioning itself to be the leading provider of semiconductors for high-speed Internet access.
The purchase, Broadcom’s ninth this year, gives the Irvine firm more technology to strengthen its development of chips for high-speed Internet access over telephone lines, known as digital subscriber line or DSL. Broadcom is already the dominant maker of chips for cable modems used in accessing the Web.
Element 14 does not yet have any revenue. But Henry T. Nicholas III, Broadcom’s co-founder and chief executive, said the acquisition will expand Broadcom’s chip market into every area of delivering high-speed or broadband access to the home and business.
“We want to be a one-stop shop for everything that is broadband,” Nicholas said Wednesday.
Analyst Mark Edelstone of Morgan Stanley Dean Witter said the purchase “fills what was a fairly meaningful hole” in Broadcom’s product line.
Investors reacted favorably to Broadcom’s early morning announcement, pushing up the company’s shares by almost 8%, or $17.69, to close at $241.94.
Broadcom also said Wednesday that it was forming a new DSL business unit, which will be based in Irvine and headed by Element 14 founder and chief executive, Stan Boland.
Under the deal, Broadcom will pay about 2.65 million shares of Class A common stock for privately held Element 14. Broadcom said it will take unspecified charges related to the purchase in its fiscal fourth quarter. The purchase will reduce Broadcom’s earnings per share by 1.5 cents a quarter through the end of next year, the company said.
Element 14 is based in Cambridge and takes its name from the periodic table of elements. The 14th element is silicon, the basic component of most semiconductors. The 68-person company also has facilities in Bristol, United Kingdom, and Mechelen, Belgium.
Element 14 specializes in technology based on what’s called asymmetric digital subscriber line, or ADSL, which enables high-speed Internet connections over copper telephone lines. Broadcom is already a dominant force in a competing DSL technology known as Very High Bit-Rate DSL, or VDSL, which is faster and requires an infrastructure of fiber-optic networks. Developed primarily for video transmission, VDSL is more expensive than ADSL technology.
“I think this is pretty indicative of Broadcom’s serious intent to become a serious force in the ADSL marketplace,” said analyst Alex Gauna of Banc of America Securities. “They’ve already done a lot internally, and this augments it.”
Nicholas said that the VDSL market will take off over the next 10 years, while ADSL products are shipping in high volume today.
Although Element 14 has yet to bring a product to market, the chips it is developing work at a higher level than those currently available from leaders in the ADSL arena, including GlobeSpan Inc. of Red Bank, N.J., Analog Devices Inc. of Norwood, Mass., and STMicroelectronics N.V. of Geneva, Switzerland.
The products on the market offer four and eight ports. Broadcom said it anticipates bringing the industry’s first 12-port chip to market in the first quarter of next year, which means it will be able to connect up to 12 lines with a single chip.
Broadcom is “obviously coming from behind,” Edelstone said. “They knew they were late, so they figured they could try to intercept the market at a higher level than the current leaders. But they’ve got some tough competition.”
Broadcom’s entree into the ADSL market also places it squarely in competition with local rival Conexant Systems Inc. of Newport Beach. Conexant, which has a large market share in a commercially popular DSL technology, is also a relative newcomer to the ADSL market.
Shares of Conexant lost $2.75, or 7.64%, to close at $33.25.
“In many ways, Conexant and Broadcom are more or less in the same boat,” although Conexant is ahead of Element 14 in bringing products to market, Edelstone said.
He added that the “jury is out” on Element 14. “They have not actually sampled any parts yet, so this is still a work in progress,” Edelstone said.
The Element 14 deal is Broadcom’s third-most expensive acquisition. In the course of eight days in August, the company announced purchases of Silicon Spice of Mountain View and its Irvine neighbor NewPort Communications Inc., each for $1.2 billion.
The Element 14 deal has been approved by the boards of directors of both companies. Nicholas said the acquisition also strengthens Broadcom’s ability to reach its customers in Europe, particularly Pace Micro Technology plc in West Yorkshire, England, Broadcom’s second-largest cable customer worldwide.
“We’re now seeing all of Europe beginning the transition to broadband. Having a local engineering presence there will be very beneficial,” Nicholas said.
Boland, who founded Element 14 in 1999, will split his time between the UK and Irvine.
(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)
Broadcom Gets Broader
Broadcom Corp. continues its shopping spree, buying technology and increasing its market strength in communications chips. Here are the 14 companies it has bought since early 1999: (Tabular data not included, not in Editorial Art database.)
