With DSP Communications (DSPC), Intel will begin to sell and develop digital signal processors, the complicated chips that capture the digital impulses and translate them into cell phone conversations. Intel already sells two other key elements of wireless devices: flash memory and StrongARM microprocessors.
"You should look at this as a beachhead into the wireless communications market in a variety of devices," said Craig Barrett, Intel chief executive, on a conference call. "We want to be the building-block supplier to all of the devices that access the Internet in a wireless fashion."
The purchase of DSPC is the latest stop on a spending spree for the company. Since the second half of 1998, Intel has purchased eight different companies, including DSPC, for more than $5.2 billion dollars.
Intel's push to diversify beyond its traditional base of PC and server microprocessors is motivated largely by a fear that the profit to be squeezed out of traditional computers has hit a plateau, according to analysts. The PC market will continue to grow, but pricing pressure, say many, will prevent Intel from maintaining its historical revenue and profit curve.
The company's most recent financial results seem to bear this out. In the third quarter, the revenue from the Intel Architecture Business Group, which is responsible for PC-centric products, grew only 1.5 percent, according to financial data released by Intel. Operating profit from this group only grew by 7.8 percent. The non-PC groups, bolstered strongly by acquisitions, constituted close to a billion, or 15 percent, of Intel's business for the quarter.
Few expect these new divisions to become a majority focus for the company, but they will play a significant supporting role.
DSPs have become one of the fastest growing, and profitable, semiconductor products in the past few years. As a result, once moribund Texas Instruments, which leads the DSP market, has seen a run on its stock.
"DSPC is a decent acquisition, but it does not fill all the gaps Intel needs for a wireless strategy," said Charles Glavin, semiconductor analyst for Credit Suisse First Boston.
The DSPC buy will put Intel into the market for phone DSPs. Eventually, however, the company needs to get into the market for more complex DSPs for infrastructure equipment, i.e. wireless relay stations, analysts said.
DSPs or other communications/wireless processors will also increasingly be incorporated into standard server products, Glavin predicted.
Intel may pursue this market through acquisitions, or through alliances with Qualcomm or a deepening of its alliance with Analog Devices. Intel and Analog are currently designing a DSP chip that will likely get merged into the Intel product line.
Under terms of the agreement, DSPC will become an Intel subsidiary under the Computing Enhancement Group, which also controls the production of flash memory and StrongARM processors. DSPC will become Intel's second subsidiary. Level One, bought for $2.2 billion earlier this year, also continues to operate as a separate entity.
Intel plans within five days to make a cash offer of $36 a share for all outstanding shares of DSPC common stock. The deal is subject to regulatory and shareholder approval.
Neither company anticipated any immediate changes to organizational structure or product lines. Intel plans no immediate layoffs at DSPC because of the merger.
Interestingly, Intel and DSPC executives signaled that the ambition of the combined companies, for now, was relatively modest. Intel stated that it is not planning to get into the broader market for DSPs currently. Instead, it would focus on chips for cell phones and handheld devices, said Barrett.
At first, Intel will continue to market DSPC's current product line of DSP chips, which are mostly sold to Japanese manufacturers such as Sanyo. Eventually, the companies will work on integrated products as well as voice-data products.
"We really are looking at the convergence of technology here," said Barrett. Davidi Gilo, ceo of DSP, stated: "Wireless data will eventually surpass wireless voice."
The companies also stated that Intel is working on obtaining the appropriate technology licenses from Qualcomm. Qualcomm provides much of the base-level intellectual property on DSPC's processors.