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Broadcom sinks after executive ouster

Several financial securities analysts express their concerns after the communications chipmaker replaces the head of a division that makes critical server components.

Shares of Broadcom dropped 16 percent on Thursday, after the communications chipmaker replaced the head of a division that makes critical server components.

Several financial securities analysts expressed worries after Broadcom replaced Raju Vegesna with Duane Dickhut on Wednesday as head of its ServerWorks subsidiary. Morgan Stanley's Mark Edelstone and Wedbush Morgan Securities' David Wu downgraded the stock, which dropped $2.49, or 16 percent, to $12.91 in trading Thursday.

ServerWorks makes chipsets that link server processors to each other and to other system components; customers include Hewlett-Packard, Dell Computer and IBM--the three biggest companies in a market that will have $20 billion in sales this year, research firm Gartner projects.

Vegesna's departure will hurt Broadcom and increase uncertainty about the company's fortunes, several analysts said.

"We believe that other key members of ServerWorks will be departing with Raju Vegesna and that considerable damage control needs to be done to avoid further instability at this division," UBS Warburg analyst Alex Gauna said. "We also believe that certain key customer relationships will also be damaged by the departures."

The departure compounds other recent changes, Merrill Lynch's Mark Lipacis said.

"We think the management change is indicative of the challenges Broadcom will face as it executes cultural and management changes triggered in part by the recent departure of the company's original co-founder and former CEO, Henry Nicholas," Lipacis wrote in a report. "We liken Broadcom's challenges to those faced by Yugoslavia, which ran smoothly while it was ruled by an iron-fisted dictator--Tito. The problems between the different groups in the country did not manifest themselves until after his passing."

The ServerWorks subsidiary is disproportionately important to Broadcom, Salomon Smith Barney's Clark Westmont said. "ServerWorks generated 23 percent of Broadcom's sales in the December quarter, while only accounting for about 5 percent to 10 percent of Broadcom's work force," he said.

Intel likely will try to take advantage of the situation, said Wedbush Morgan's Wu.

"Intel has been aggressively competing in this market with new generations of chipsets," Wu said. "With the uncertainties created at ServerWorks, we believe Intel will take advantage of the situation. Intel has significant financial and personnel resources versus ServerWorks which has only 120 engineers."

Intel plans two server chipsets in 2004. One, code-named Lindenhurst, will be used in two-processor servers, while the other, Twin Castle, is geared for four-processor systems. Lindenhurst is geared for use with a future version of the Xeon chip, called Nocona, for dual-processor machines. Twin Castle will be paired with the Potomac version of Xeon for systems with four or more processors.