VLSI mulls bid from Philips
Published Saturday, February 27, 1999, in the San Jose Mercury News
Analysts say deal would make sense; stock soars 44%
Philips Electronics NV, the Dutch maker of chips and consumer electronic equipment,
made an offer Friday to buy VLSI Technology Inc. of San Jose, triggering a 44 percent
jump in VLSI's languishing stock price.
Philips offered to pay $17 a share for the manufacturer of application-specific integrated
circuits, which are specialized semiconductors, and asked for a response by Wednesday.
Alfred Stein, chairman, president and chief executive of VLSI, said the company is
evaluating the bid. ''We're having a regularly scheduled board meeting next week,''
Stein said. ''We will assess this offer, keeping in mind that we represent the
shareholders, and do what is best for the shareholders.''
VLSI had a rough 1998, hurt by the worldwide semiconductor slump, competition from
much-larger companies and poor management, analysts said. Several top executives left
during the year, and Stein has attracted considerable criticism for the departures. Both
sales and profit fell: Revenue was down 23 percent to $547.8 million, and profits were
down 71 percent to $20.9 million.
The company started out making so-called ''core logic'' chips for PCs and Apple
computers, but it and other companies in that business were squeezed out within a
couple of years following Intel's entry into the market, analysts said. VLSI subsequently
focused on specialized chips for high-end computers, such as Silicon Graphics Inc.
machines; communications equipment, such as network switches made by Cisco
Systems Inc.; video games; and wireless gear, such as cell phones made by Ericsson
AB.
But over the last few years, VLSI has been hurt as Ericsson, which accounts for as
much as 30 percent of VLSI's business, faced a slowdown in its Asian markets and
competition from cell phones made by Nokia, said Clark Westmont, an analyst in San
Francisco for NationsBanc Montgomery Securities. Other customers, such as SGI and
Sega, also had problems, Westmont said.
Nevertheless, VLSI would offer Philips ''good, valuable customer relationships, and
decent technology,'' Westmont said. ''VLSI also has good wireless market and
consumer-electronics exposure that Philips has some interest in. The two areas are neat
fits.''
Philips could also use VLSI's digital signal processors to improve its consumer
electronics equipment.
From VLSI's point of view, an acquisition by a bigger player would make some sense,
said Jordan Selburn, an analyst at Dataquest Inc. in San Jose. ''It's very difficult for a
company in the $500 million to $1 billion range to compete as a semiconductor maker,''
he said. A new manufacturing facility ''built from scratch costs $1 billion. How does a
company VLSI's size afford that?''
Selburn pointed out that leading companies in VLSI's market are much bigger, including
IBM, Lucent Technologies and NEC.
The bid by Philips has sparked rumors of possible competing offers. Philips action --
making an offer public before the target company's management has accepted or rejected
the terms -- is what financial analysts call a ''bear hug.'' That is, the potential buyer
stops short of taking a hostile bid directly to shareholders, but puts pressure on
management of the target company by making the proposal public. But other companies
may now be interested in VLSI, including Intel Corp. or the European firm
STMicroelectonics, financial sources familiar with Silicon Valley speculated.
VLSI was wooed last year by LSI Logic Corp., a Milpitas-based
semiconductor maker, but the deal fell apart. ''We did actively
explore the acquisition of VLSI but we decided not to (do it)
because we did not see it as fitting in with our long-term
strategy,'' an LSI Logic spokesman said. He said the company has
no intention of renewing its pursuit of VLSI.
Financial sources said the field of potential buyers has narrowed because steps taken by
chief executive Stein in the wake of the abortive talks with LSI make a stock-swap
transaction less feasible. Last year, shortly after the company announced layoffs of 190
workers, Stein renegotiated his contract with VLSI's board. In addition to renewing
various perks and benefits in the case of ''change of control,'' the board granted Stein
options for 1 million shares of VLSI. If a potential buyer were interested in a stock-swap
transaction, the granting of such options would come under regulatory scrutiny and
possibly sour the deal. Stein declined to comment on his compensation package.
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