Intel's rush to networking
San Jose Mercury News - Published Friday, March 5, 1999
Level One: $2.2 billion bid makes it serious competitor.
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.
o~~~ O |
