Intel's rush to networking
Level One: $2.2 billion bid makes it serious
competitor.
BY DEBORAH CLAYMON
Mercury News Staff Writer
Intel Corp. on Thursday said it intends to buy chip maker Level
One Communications for approximately $2.2 billion, the largest
acquisition in the company's 31-year history and its most significant
move yet into the exploding market for network communications.
Although Intel has been steadily extending beyond its core business
of personal computer microprocessors, the purchase makes the
Santa Clara chip giant a serious competitor instantly in a market analysts predict will grow 50
percent per year. The PC market, in contrast, has slowed to about 15 percent annual growth.
''Our objective is to buy, license or develop any technology we think it takes to be number one in
this industry. Period,'' said Mark Christensen, vice president and general manager of the Network
Communications Group at Intel.
Sacramento-based Level One develops semiconductors for high-speed data networking and
telecommunications applications. It sells these communications processors to networking equipment
manufacturers like Cisco Systems and telecommunications equipment manufacturers like Siemens
and Nortel, which use them to power the specialized computers that run voice and data
communications networks.
But getting a bigger piece of the networking business -- where Intel has dabbled in recent years --
is not Intel's sole motivation for the purchase. Executives say the purchase of Level One will also
help make Intel smarter at what it already does best: Build the engines for top-selling personal
computers.
''As PCs become less of a desktop tool and more of a communications appliance, Intel needs to
understand how the network works so it can make the best appliances for it,'' said Sandy Harrison,
an analyst with Pacific Growth Equities.
The merger also makes legitimate the young market of ''merchant'' communication semiconductor
specialists lead by Wall Street phenom Broadcom Communications of Irvine. These semiconductor
upstarts sell chips that are pre-designed for specific networking functions, replacing more expensive
application specific integrated circuits, or ASICs, which networking equipment manufacturers must
have specially built to fit their needs.
Cheaper chips
As the networking market matures, these upstart chip developers anticipate that equipment makers
will increasingly opt for cheaper, off-the-shelf networking semiconductors.
''Unlike the PC market, where Intel has a commanding position, Intel now has the opportunity to
tap into a market where the heart of the system is still largely controlled by processors created
inside the major networking companies,'' said Bruce Walicek, senior semiconductor analyst with
BT Alex. Brown.
That's a strategy Intel knows well. The company is taking the same approach to higher-end
computers, such as workstations and servers: Offering cheaper, standardized processors into
markets where companies like Silicon Graphics Inc., Hewlett-Packard Co. and Sun Microsystems
once used their own chips exclusively.
But Intel is not alone in eyeing the market for networking chips. Just two weeks ago, LSI Logic
Corp. of Milpitas offered $100 million for Seeq Technology, a competitor to Level One. The
purchase puts LSI Logic directly in the path Intel's expansion into networking.
But it is Intel that may lag behind, because LSI was already selling some of its own chips into this
market, said Jeremy Donovan, communications semiconductor analyst at Dataquest. ''LSI Logic
will be selling to its existing customer base,'' he said, while Intel has to start from scratch.
Donovan sees Intel's merger with Level One as a move that gets the larger company out of its
comfort zone. ''The acquisition helps dispel the very broadly held sentiment that everything Intel
does, they do to sell more microprocessors,'' Donovan said.
Despite Intel's market power in PCs, the combined companies will not immediately own the
networking market. Level One has faced fierce competition from Lucent Technologies -- an
equipment maker which has its own significant semiconductor operation -- and Broadcom.
''It doesn't change things overnight,'' said Walicek.
His feelings are shared by Bill Ruehle, Broadcom's chief financial officer. ''The acquisition means
that a company in our market is no longer there,'' Ruehle said confidently. 'I think we'll be able to
take advantage in the marketplace while Level One is distracted by the details of the acquisition.''
Diversifying
With PC sales growth lagging, Intel has been searching for other ways to keep its business healthy.
In 1998, Intel's sales growth slowed to 5 percent after a steady climb of 20 percent each year since
1990.
Intel expects big things from its assault on higher-end computing, but in recent years it has moved
increasingly toward networking.
The company already develops and markets adapters, hubs, routers, switches and other network
management devices aimed at small and medium-sized businesses.
As part of a recent push to further serve this market, Intel spent $180 million to acquire Shiva
Corp., expanding its product line in remote access and virtual private networking technologies.
Intel and Level One have been working together since July 1998 on research into chips that can
connect computers at very high speeds over regular phone lines. A joint product is expected to be
released by the second quarter of this year.
Bought with stock
Level One is the first company Intel has ever purchased with stock -- although, given its substantial
reserves, it could easily have paid cash -- and is by far its most expensive investment ever. It
bought graphics chip maker Chips and Technologies Inc. of San Jose last year for $420 million,
and invested $500 million in Idaho-based memory chip maker Micron Technologies Inc.
Intel will issue new shares, then trade 0.43 share for each Level One share, a valuation of $48.75
per share, 80 percent more than its closing price Thursday.
Level One will become a wholly owned subsidiary of Intel, reporting to Intel's Network
Communications Group. Intel's Christensen said the company plans to keep all of Level One's
employees.
TOP OF PAGE
©1999 Mercury Center. The information you receive online from Mercury Center is |
