Intel's $2.2 Billion Networking Play
By Marcy Burstiner
Staff Reporter
3/4/99 10:02 PM ET
SAN FRANCISCO -- If Intel (INTC:Nasdaq) can't beat 'em, it will buy 'em.
The chip giant is paying $2.2 billion to buy network chipmaker Level One
Communications (LEVL:Nasdaq), a deal Intel has hinted at for the past few
weeks.
Under the terms of the deal, announced after Thursday's market close, Intel
will exchange .43 shares of its stock for every share of Level One, issuing a
total of 18.6 million shares. The purchase is Intel's biggest to date, almost
six times more than the $387 million it spent to buy graphics chipmaker
Chips & Technologies in 1997. Intel closed at 113 3/8, a 1.2% decline for
the day. Level One dropped 16% to 27 1/8 on a downgrade by Adams
Harkness & Hill.
Rumors have swirled for months about Intel buying out a networking
company. In September, TheStreet.com's own Herb Greenberg suggested
that Intel would buy 3Com (COMS:Nasdaq).
Today, Intel Vice President Mark Christensen tried to put that rumor to rest.
"We have no plans to enter into the enterprise or voice telco market," he
said, adding that with the Level One acquisition, Intel expects both 3Com
and Cisco Systems (CSCO:Nasdaq) to become major customers of Intel's
networking chips.
The acquisition marks a dramatic change in strategy for the world's biggest
chipmaker, says Nationsbanc Montgomery Securities analyst Jonathan
Joseph. Until recently, the company believed it had the capability to develop
everything internally. "They thought that if anything was worth developing
then God would have given them a developer for it," he says.
But no more. Besides the latest acquisition, Intel has been making dozens
of investments, putting $2.5 billion in a venture capital fund spread
throughout the electronic communications industry. Intel also formed a
partnership recently with Analog Devices (ADI:NYSE) to develop a new
architecture for digital signal processors, a type of chip used in wireless
communications. Intel closed a $185 million acquisition Monday of Shiva, a
company that develops remote access technology.
Intel also has a small stake in Broadcom (BRCM:Nasdaq), which makes
chips for cable modems, and competes directly against Level One in fast
ethernet. But aside from a return on its money, Intel has no product alliance
with the company.
Intel wants to dominate the networking chip market, says NationsBanc
Montgomery Securities analyst Clark Westmont. "The dream is to be Intel
inside networking," Westmont says. "But I think there are a lot of challenges
to making that happen." (Montgomery has an underwriting relationship with
Level One, but not Intel.)
Elias Moosa, a semiconductor analyst with Thomas Weisel Partners, says
Intel bought the stake in Broadcom to ensure itself a place in the cable
modem market. It's buying Level One, he says, because Intel has been
losing ground in the growing ethernet market. "3Com was actually beating
Intel in chip development," Moosa says. (Weisel has no underwriting
relationship with Intel or Level One.)
Intel has had a large market share in networking products for the PC and for
equipment used by small businesses, but Level One puts them in a higher
field -- that of chips for networking systems, the Internet and intranets. "It's
really something new for us," says Intel spokesman Robert Manetta. "Level
One is a building block supplier."
The acquisition is a bigger version of one made last year by Intel competitor
National Semiconductor (NSM:NYSE). Last April, National Semi spent
$122 million for network chipmaker CommCore Semiconductor. But under
National Semi's leadership the network division has missed a key product
cycle. In January, CEO Brian Halla took the division under his personal
charge.
But Commcore had no track record to speak of, Westmont says. What
happened to National Semi shows how murky the waters could be for Intel in
the networking arena. "National had it all -- 100% of the market three years
ago, but they missed the product transition to more highly integrated chips."
It was at that point, Westmont says, that Level One leapfrogged National
Semi to take market away, and someone else can come and do the same
again, he said. "The really successful companies have been pure plays,
nimble and fast-moving."
While Intel is a great manufacturer, it is not known for speedy development
of new products, he says.
This concern wasn't missed by Kevin Landis, portfolio manager with First
Hand Funds, who has been long both Intel and Level One and expects the
deal to lift both stocks. "It's great for people like me who own a lot of Level
One," he says.
"The big question for me is whether Intel becomes a bull in the china shop.
Intel is not likely to do something small. Up until now the networking market
has been a collection of smaller, hungrier companies level-headed about
the way they compete," he adds. |
