Conexant Up 42% After Announcing Division Spinoff

Conexant Systems Inc. got a big boost Thursday as shares surged 42%, one day after the Newport Beach chip maker said it would spin off its fast-growing Internet equipment division into a separate public company.

Conexant stock climbed $15.56 a share to $52.63 in trading of 66.7 million shares, making it the most active issue on the stock market. The stock, however, is still far from its high in February of $124.42 a share.

Thursday’s hike added about $3 billion to the company’s market value, putting it at nearly $12 billion. The company, one of the nation’s largest makers of communications chips, ranks seventh among Southern California technology companies in market value, based on closing prices Thursday.

While Conexant has investors agreeing that its parts are worth more than the whole, its challenge now is to maintain momentum and employee morale in the uncertain months ahead, analysts say.

“Prior to this, Conexant was a company that you had to really do work to understand,” said analyst Alvin Kressler of Kaufman Bros. LP. “It became hard for investors to really understand the total market opportunity [for] Conexant.”

The spinoff will break the business into more clearly identifiable market opportunities for investors, Kressler and other analysts said.

Some observers predicted that the move could be just the first step in a long-term strategy that would see the company spin off other units as well.

Nathaniel Cohn, an analyst at Goldman Sachs, said that if the various parts of Conexant’s business were valued separately, they could be worth more than twice the market value of the company before Wednesday’s surprise announcement.

The spinoff made good strategic sense, Cohn said. “But from an organizational perspective, it’s definitely a challenging exercise,” he said.

“While there is a lot of excitement around the Internet infrastructure IPO, it will be a challenge to preserve the morale” in the four Conexant units that will be left behind, now called the personal networking company, Cohn said.

It has not been decided who will head each of the respective companies or even which one will retain the Conexant name. But employees from all of Conexant’s current divisions, no matter where they end up working after the spinoff, will receive stock options in both companies.

Conexant Chairman Dwight W. Decker said Wednesday that the shared options plan would be a key selling point in maintaining pride and motivation at both companies.

While employees may be excited about the options, they also are concerned about who will head each company and where the popular Decker will land.

Early speculation about future management has focused attention on Raouf Y. Halim, the hard-charging head of Conexant’s Network Access division, which will become the new Internet equipment company. Halim joined Conexant in 1991 from Hayes Microcomputer Products.

Shortly after a conference call with analysts Wednesday afternoon, Decker met with several hundred managers at Conexant’s Newport Beach headquarters.

“The mood was contemplative and a little bit subdued,” said Conexant spokesman Scott Allen. As managers began to understand the deal, they started “feeling pretty good,” he said.

And by the time employees gathered in an auditorium for a 9 a.m. meeting Thursday, the stock price had jumped more than $10 a share, and Decker got a round of applause when he walked in, Allen said.