Broadcom eyes high-speed arena with new acquisition

Monday's deal will give Broadcom the opportunity to become a more important player in the world of computer design. While Broadcom primarily makes processors for high-speed networks, ServerWorks concentrates on chipsets--pieces of silicon that shuttle data inside computers--for servers and storage systems.

Broadcom will expand from developing technology that connects different devices into working on ideas that can help improve the connections inside those devices.

Thomas Weisel Partners analyst Jeremy Bunting said the deal is very complimentary. "What is the high-speed component inside a server? It's the chipset...What you've got is an opportunity where Broadcom can expand its available market."

The acquisition also unexpectedly brings Intel and Broadcom, two processor rivals, closer together. ServerWorks is a close ally of Intel, developing chipsets for Intel's existing line of Xeon server chips. The company is expected to come out with chipsets for the first Pentium 4 chips for servers in the near future.

As part of the $957 million deal, Broadcom acquires a license to some crucial intellectual property that is central to one of Intel's key processor lines--as well as an open invitation to see future product plans. The deal lasts through 2008, sources said.

Historically, the relationship between Broadcom and Intel has been hostile. The two companies have filed a series of intellectual property lawsuits against each other in the past year.

The two recently settled a suit in which Intel accused Broadcom of trying to steal company secrets by hiring Intel engineers. Another lawsuit is pending.

Intel also has been trying to take market share in the communications processor market, Broadcom's key market.

Intel owns 1.2 million warrants of ServerWorks stock, said an Intel spokesman, about 5 percent of the company.

Broadcom has bought about a dozen companies in the past year. The addition of ServerWorks' product line and roster of blue chip clients should help expand its own efforts to provide higher-speed connections between networks and hardware.

ServerWorks, whose products have been used by server and storage makers such as Intel, Compaq Computer, Dell Computer, EMC, Hewlett-Packard and Nortel Networks, designs I/O circuits that speed communication between CPUs and devices such as network cards. The company's primary product is a family of devices that address a wide range of memory requirements for servers, storage hardware, network appliances and workstations.

Irvine, Calif.-based Broadcom's objective in the deal is to help advance 10-gigabit-per-second communications technologies such as InfiniBand, Fibre Channel and Ethernet into server and storage technologies, while at the same time expand its own role in those same areas, according to the company.

"This is a very significant transaction for us," Broadcom CEO Henry Nicholas said during a conference call Monday morning. ServerWorks "is a company that has significant critical mass...This is a company which has significant financial leverage and substance."

Although ServerWorks serves different segments of the market from Broadcom, coordinating acitivities shouldn't be that difficult, said Nathan Brookwood, an analyst at Insight 64. ServerWorks' chips essentially exist to move data around at high speeds, conceptually the same thing that Broadcom's products do. ServerWorks has also been expanding beyond servers to participate in the larger communcations market.

"It's not like Mars and Venus," he said. "They are both in high-performance markets."

Both Bunting and Brookwood chalked up any potential friction between Intel and Broadcom as the inevitable byproduct of industry competition.

"Mark Christensen (the general manager of Intel's communcation division) will be a little concerned about this, but Mike Fister (who heads up server architectures at Intel) needs help on chipsets," Brookwood said.

Kim Brown, vice president of business development at ServerWorks, said Intel will only benefit because servers and storage systems will be able to communicate over networks faster.

"It is going to let Intel make great advances in servers," he said. Computer makers "are going to be able to design more efficient, faster machines with greater bandwidth."

Nicholas stressed that the deal was unlike previous buys, since ServerWorks is not an early-stage company and has been profitable for the past year. He said he anticipates that ServerWorks will close fiscal 2000 with $190 million in revenue.

Under the terms of the agreement, Broadcom plans to issue approximately 11 million shares of its common stock in exchange for all outstanding shares of ServerWorks' common stock. The transaction is worth about $957 million, based on Broadcom's closing price Friday of $87 per share. Up to 9 million additional Broadcom shares will be reserved for future issuance to those holding ServerWorks stock, options and warrants upon satisfaction of certain performance goals.

The transaction, which is slated to close within 60 days, is expected to be added to Broadcom's earnings per share in the range of 2 cents to 3 cents per share per quarter through 2001, the company said.

Broadcom, which has been a partner with ServerWorks for more than a year, underscored that company's tight alliance with Intel as a key asset. ServerWorks, formerly known as Reliance Computer, has a technology agreement with Intel that ensures its products will be able to communicate with Intel chips through 2008.

Nicholas said that under the proposed transaction, Broadcom will focus on strengthening the Intel relationship as well as a pact that ServerWorks has with IBM. ServerWorks has licensed high-end server technology from IBM in a five-year agreement and has said that this deal will make possible mainstream systems that are more reliable and much faster in internal data transfer.

Upon completion of the acquisition, ServerWorks' president and chief executive, Raju Vegesna, will become vice president and general manager of Broadcom's ServerWorks business division. The new unit will operate as a wholly owned Broadcom subsidiary based in Santa Clara, Calif.

Boards of both companies have approved the transaction, which still needs approval by ServerWorks' stockholders and must meet regulatory requirements and other customer closing conditions.

Broadcom said it expects to take a one-time charge for research and development expenses related to the acquisition in its first quarter, ending March 31.

In related news, Broadcom on Monday also completed its deal to acquire Israeli chipmaker VisionTech. The acquisition, announced last November, marked Broadcom's 12th purchase last year.