Conexant to Spin Off Internet Equipment Unit

By KAREN ALEXANDER

Sept. 14, 2000 12 AM PT

TIMES STAFF WRITER

Seeking to mine elusive shareholder value, Newport Beach chip maker Conexant Systems Inc. said Wednesday that it would spin off its high-growth Internet equipment business as an independent company.

Conexant, one of the largest makers of semiconductors for the communications market, follows in the path of other companies that have spun off promising divisions in major public offerings.

Often overshadowed by Broadcom Corp. in Irvine, Conexant has failed to match its rival’s meteoric increase in stock value--even though it has enjoyed solid growth. Its stock has lost more than 40% of its value since the beginning of the year.

Conexant, itself spun off from Rockwell International Corp. nearly two years ago, will sell about 20% of the proposed stock in an initial public offering scheduled for January and distribute the remaining shares of the still-nameless firm to Conexant shareholders.

Conexant shares rose 10% Wednesday, gaining $3.31 to close at $37.06 a share before the company announced its plans. In after-hours trading, the stock jumped an additional $6.44 on the news to $43.50 a share.

Industry analysts hailed the decision, saying the spinoff will plant the new Internet infrastructure business squarely into a market niche that is more highly valued by the stock market than the current, more diversified company.

“It makes a tremendous amount of sense,” said analyst Charles Boucher of Bear, Stearns Securities Corp. The spinoff “competes in some of the hottest markets,” where narrowly focused competitors are more highly valued by Wall Street, he said.

The new formula will probably make Conexant’s parts worth more than its whole, but how much it will boost the two companies’ share prices is unclear, said analyst Rick Billy of SG Cowen Securities Corp.

“I don’t think it’s going to be dramatic, but I do think it’s going to work,” Billy said.

Conexant has about 8,500 employees worldwide, including nearly 900 in Newport Beach. The new business unit is expected to employ about 1,500 people. Both companies will remain headquartered in Orange County, said Dwight W. Decker, Conexant’s chairman.

Other decisions, such as which company will retain the Conexant name and who will head each one, have not been made yet. Decker said that he does not know which company he will serve but that current Conexant executives will probably be at the helm of both companies.

“We have created two very strong semiconductor businesses targeting markets that are significantly different in many respects,” Decker said.

The spinoff “will unleash both to realize their full growth potential,” he said.

The networking access division, which will become the new Internet infrastructure company, has doubled in sales in each of the past two years and is expected to reach $1 billion in revenue next year. Sales are expected to exceed $550 million in the current fiscal year, which ends Sept. 29, Decker said.

The division’s top three customers are Cisco Systems, Lucent Technologies and Nortel Networks.

The remaining business, now called the personal networking company, consists of four Conexant divisions that make chips for mobile communications and broadband products, such as cable modems, mobile phones, digital cameras and video games. The remaining company also will retain all of the company’s manufacturing and testing facilities.

Sales for the personal networking company are expected to exceed $1.5 billion this fiscal year, accounting for about 70% of Conexant’s total revenue.

While high-flying technology stocks like Broadcom and Internet infrastructure companies PMC-Sierra Inc. in Campbell, Calif., and Applied Micro Circuits Corp. in San Diego trade at rates roughly 100 times the value of their estimated annual earnings, Conexant stock has traded at 35 to 40 times its estimated earnings.

“Conexant’s shareholders are not benefiting from that nugget of value” because the firm’s promising Internet equipment business is “a gem buried in a mediocre rock,” analyst Boucher said. Other products, such as PC modems, enjoy high-dollar sales figures but slow growth, he said.

Conexant was hurt by flat sales in its wireless communications business last quarter after a South Korean mandate on a technology standard caused sales there to slump.

Analysts point out that Conexant’s spinoff plan carries a risk that the remaining company will lose more value than the new one gains.

“When you take out the [Internet infrastructure business], you’re taking a lot of the growth out,” Billy said. “What’s left isn’t pretty.”

Some chip companies have seen leaner profit margins and fading investor enthusiasm as their products become interchangeable commodities and prices for them fall. Conexant is beginning to encounter this, said Mike Wolf, an analyst with Cahner’s In-Stat Group.

Lucent recently spun off its high-growth, high-margin semiconductor unit from its systems business, raising cash and making its stock a more valuable currency to use for acquisitions.

Though Conexant is separating two semiconductor businesses, it is following a similar blueprint, Wolf said. He said he would be concerned if the new company takes the “high-growth, exciting stuff” with it.

Decker, however, said he believes that both companies--and their shareholders--will probably benefit from the separation.

“Focus is valued in the marketplace,” he said. “It could very well be the case that each of these companies is more valuable in the marketplace than they are together.”

The Internet equipment company’s chief competitors will be PMC-Sierra, Applied Micro Circuits and Vitesse Semiconductor Corp. in Camarillo, Calif., Decker said. The competition for the remaining personal networking business are Broadcom, Texas Instruments Inc. in Dallas, LSI Logic Corp. in Milpitas, Calif., and ST Micro Electronics in Geneva, Switzerland, he said.

Decker briefed anxious Conexant employees about the news shortly after he detailed the plan in a conference call with market analysts. For current Conexant employees, the news could prove profitable no matter which company they end up working for. For each Conexant stock option, they will receive an option in the new company as well.

Once the companies are split, they will remain close friends, Decker said. The two companies will enter into a multiyear agreement to share technology and marketing efforts.

The new entity will not undertake any of its own manufacturing or testing.

Times staff writer Robin Fields contributed to this report.

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Stock Slump

Unlike some of its high-flying competitors, Conexant’s stock performance has been disappointing. The company’s shares have lost more than 44% of their value since the start of the year.

Jan. 3: $65.06

High: $124.42

Wednesday’s close: $37.06

Source: Bloomberg News

Conexant Spinoff

A look at the company and the proposed split:

Conexant Systems Inc.

Headquarters: Newport Beach

Chairman: Dwight W. Decker

Employees: 8,500 worldwide

Expected annual revenue: More than $2 billion

Internet Infrastructure Company