CONEXANT LOOKS TO UNLOCK VALUE:
redherring.com
Conexant looks to unlock value
By Stephen Lucey
Redherring.com, November 15, 2000
Conexant Systems (Nasdaq: CNXT) silenced its critics Monday when it filed to take its fast-growing Internet infrastructure division public. Although Conexant had disclosed its intent to bring the division public in September, many investors were concerned that the deal would not stay on track given the market's continued volatility and the slowdown in the IPO pipeline.
But with the spin-off now apparently on course for the first quarter, the ailing shares of the Newport Beach, California-based communication chip conglomerate managed a much-needed 11 percent gain, closing Tuesday at $29.38. For a stock that's down 77 percent from its February high of $132.50, the filing came as welcome news to T. Peter Andrew, an analyst at A.G. Edwards in St. Louis.
Not only did the filing lend credence to Conexant's commitment to spin off the division; it also gave investors financial details of the Internet infrastructure division. Previously, Conexant management had only presented financial information about the division on a quarterly basis, and only as a division, not as a stand-alone entity. That, according to Mr. Andrew, made it difficult to draw valuable comparisons between the division and its peers.
NEED A NEW NAME?
In fact, all that investors seem to be waiting for now is the name of the new division. Although it has tentatively been named "Conexant Spinco," the name is expected to change when its parent discloses final terms for the $100 million offering, to be co-led by Credit Suisse First Boston and Morgan Stanley Dean Witter.
According to Mr. Andrew, the key to valuing what is now known as the network access division (NAD) lies in its three units. The first is the wide area network (WAN) transport area, which provides silicon and software for hub, switch, and router companies such as Cisco Systems, Lucent Technologies, and Nortel Networks. Second, the broadband access area provides central office and customer premise equipment to companies such as Lucent, Copper Mountain, 3Com, and Nokia. Finally, its multi-service access area provides silicon and software solutions for remote access concentration equipment, which is led again by Cisco, Lucent, and Nortel.
Mr. Andrew believes that, as a stand-alone company, NDA could be worth as much as $40 per share to Conexant, a level he says would be a 50 percent discount to its peer group. While the WAN transport and broadband access areas are decidedly more attractive than the multi-service access business, NDA's overall revenue growth has propped up slowing sales of Conexant's personal networking division.
While personal networking -- which includes sales of equipment for the personal computing, personal imaging, digital infotainment, and wireless communications markets -- accounts for 68 percent of Conexant's total revenue, NDA was its fastest growing division. For the year ended September 30, NDA's revenue more than doubled, climbing 108 percent to $579.2 million, according to the company's filing.
With such strong demand and solid revenue numbers, the obvious question is: why would Conexant let its best division get away?
NOT A NEWCOMER
Conexant is well aware of the value of the networking division and could pursue acquisitions with proceeds from the offering. The company plans to distribute the shares not offered in the IPO to Conexant shareholders.
After all, this is not a new technology company. Conexant traces its roots to the 1960s, when it was a part of Rockwell International (NYSE: ROK). And because Conexant was itself spun off from Rockwell at the end of 1998, the strategy is not unfamiliar to its management, many of whom are mainstays from the Rockwell days.
But beyond the spin-off decisions, investors should be aware that Conexant has pursued a roll-up strategy of acquiring emerging companies to diversify NDA's product line and revenue stream. In the last 12 months alone, the company has made ten acquisitions, the last six of which had an aggregate value of $1.6 billion. These most recent six are Microcosm Communications, Maker Communications (Nasdaq: MAKR), Applied Telecom, HotRail, Novanet Semiconductor, and Netplane Systems.
Because most of the companies are small, the acquisitions brought engineering talent but none of the problems usually associated with integration. Since NDA is dedicated to the new product lines, Mr. Andrew says that the engineers stay on board without interruption because they now have what they most covet -- hyper product development.
So while it may seem on the surface that the decision to carve out Conexant's strongest division is a mistake, the spin-off gives the company ammunition to rebuild its revenue stream through acquisitions. Although filing papers with the Securities and Exchange Commission may be a small step on the road to the public markets, it was certainly an important event for Conexant's shareholders. |
