((FYI) - from Investors BD)Why Did Texas Instruments Shell Out For
A Small Fry?
Date: 12/8/97
Author: Reinhardt Krause
The Internet's big appetite for faster access has prodded chipmaker Texas
Instruments Inc. to buy a small modem company.
San Jose, Calif.-based Amati Communications Corp. could become a big
part of TI. It holds key patents on an emerging technology for faster
Internet access. As a result, a company that had only $13.2 million in sales
for the fiscal year ended Aug. 2 commanded a $395 million price from TI.
The deal positions TI as a leading supplier of chips for digital subscriber line
technology, analysts say.
Phone companies such as US West Communications Group and GTE
Corp. are starting to upgrade networks with DSL gear to offer much
speedier Net access. DSL modems, which work over existing phone lines,
transmit data about 200 times faster than today's standard modems.
The price tag of 30 times annual revenue might appear steep. But TI says
the deal is well worth it.
''What's the net present value of the next generation of global Internet
connectivity worth?'' said Greg Waters, TI's director of network access
products. ''This arguably gives TI the premier position of chips, software
and field trial experience (in DSL).''
The Amati deal also could add to Dallas-based TI's already healthy stream
of licensing revenue, analysts say.
''Amati holds a lot of intellectual property,'' said Will Strauss, president of
Forward Concepts Inc., a Tempe, Ariz.-based market research firm.
''That's the thing I can see that makes the deal worth the $395 million.''
TI has a good nose for royalties. It already garners a few hundred million
dollars a year in royalties on chip patents, analysts say.
Amati has licensed its technology to Canada's Northern Telecom Ltd.,
France's Alcatel , Japan's NEC Corp. , PairGain Technologies Inc. of
Cerritos, Calif., and chipmakers Analog Devices Inc. of Norwood, Mass.,
and Motorola Inc. of Schaumburg, Ill.
Then again, a new licensing stream might not result from the Amati deal.
Even so, TI could be happy to emerge as a leading supplier of DSL chips.
''The main thing for TI is that if this technology (DSL) wins going forward,
they want to make sure they have it locked up pretty good,'' said Daniel
Niles, financial analyst with BancAmerica Robertson Stephens Inc. in San
Francisco. ''I don't think royalties is the first reason for this.''
About 40% of TI's business now comes from specialized chips called
digital signal processors. Amati's technology could be included in TI's DSP
chips to suppliers of networking gear, analysts say. The technology would
make the DSP chips programmable for DSL gear.
One question, though, is how important Amati's technology - mathematical
algorithms that are programmed into chips - will be in the future.
Modem chips squeeze more speed over phone lines by using these
algorithms. The algorithms implement digital modulation schemes - a trick in
physics that boosts speed. DSL is one type of modulation.
Amati's technology is based on a technique called discrete multitone, or
DMT, modulation. Most DSL gear bought by phone companies so far,
however, uses a different modulation approach. It's called carrierless
amplitude phase, or CAP.
Red Bank, N.J.-based GlobeSpan Technologies Inc. , formerly a unit of
AT&T Corp., is the main supplier of CAP-based chips.
Still, many analysts think DMT techniques will win out in the long run.
''TI's intention is to become the Intel (Corp.) of the DMT world,'' said
Charles Pluckhahn, an analyst with Dain Bosworth in Seattle.
Pluckhahn notes that like TI, Westell Technology Inc. also think DMT
modulation will play a big future role. Aurora, Ill.-based Westell wanted to
buy Amati, as well.
In October, it tried to acquire Amati in a stock deal valued at $394 million.
Then TI swooped in with a cash offer. Amati will pay Westell a $14.8
million breakup fee.
TI expects to take a one-time charge in the fourth quarter for in-process
research and development. The 120-employee Amati will become a
subsidiary of TI's semiconductor group.
Westell also is getting rights to make and sell Amati's system products.
Westell's DSL customers include Philadelphia- based Bell Atlantic Corp.,
Chicago-based Ameritech Corp., Bell Canada, GTE and US West.
TI even will sell chips to Westell. And Pluckhahn notes that by acquiring
Amati, TI also freezes out rival Motorola. Motorola had been developing
DMT-based chips for Amati.
TI expects to roll out new chips using Amati's technology in the first quarter
of '98.
Waters says that TI has scored a coup in gaining Westell as a customer.
''(Westell), the world's largest shipper of CAP modems and a public
partner of Motorola, is now very public in its ambitions to incorporate TI's
DSP technology in, really, all their systems going forward,'' Waters said.
''That's quite significant from our standpoint.''
Acquiring Amati is one of a series of moves by TI to bolster its thriving
DSP business. TI held about 45% of the $2.4 billion worldwide DSP
market in '96, says Forward Concepts.
TI recently announced a $100 million venture fund to seed new markets
related to DSPs.
(C) Copyright 1997 Investors Business Daily, Inc. |
