2HRS2GO: Intel deal a no-brainer for Xircom

COMMENTARY -- Sure was convenient to announce a $748 million cash acquisition on a holiday, wasn't it?

"This is simply when the deal came together," Xircom (Nasdaq: XIRC) CEO Dirk Gates said during yesterday's conference call. "We wanted to get this on the table as soon as possible. ... The sooner we could get this deal announced and continue working forward to get it closed, the better off everyone was. This just happened to be the most convenient day."

Intel (Nasdaq: INTC) announced its purchase of Xircom on Martin Luther King Jr. Day, when the financial markets were closed, which probably explains the paucity of analysts on the conference call. Heck, there weren't even many business journalists -- one of the questioners was a Los Angeles Times general assignment reporter filling in for a colleague.

A couple of analysts found the timing curious, since this also happens to be the week in which Intel and Xircom report earnings. Xircom was originally scheduled to report first quarter earnings on Thursday, but moved it up to coincide with the Intel announcement.

At least one buy-side analyst wondered if Xircom didn't pursue the deal partly because the company knew its first quarter results would be lousy. The company earned a penny per share in the first quarter, missing analyst consensus by 11 or 13 cents, depending on who you ask.

Including those first quarter results, Xircom has reported disappointing numbers three out of the last four quarterly reports.

With that kind of performance lately, it's easy to see why Xircom bailed out. The company's stock took its first serious blow in February of last year and has been gradually fading ever since:

Executives noted Xircom's products complement Intel's line of network access products. Intel has a strong presence on the desktop, but not much in the mobile space where Xircom plays. "Mobile computing is really the fastest growing PC market segment," said Greg Lang, vice president of Intel's Network Communications Group.

Xircom's poor first quarter had nothing to do with the decision to be acquired, Gates said. The companies have been talking about the deal since the quarter began, executives said. Some analysts wonder why bother buying Xircom, since Intel has long said it wants to invest in rapidly growing fields that would help sell more chips. Laptop networking cards wouldn't seem to qualify these days.

But the real impetus, Gates said, was a recent shift to the Mini PCI specifications that lets hardware makers design connections for smaller units that are compatible with the PCI standard that desktop computers use for plug-in cards and other devices. Intel has integrated chip designs specifically for Mini PCI motherboards.

Xircom's specialty is small cards and embedded units, but it doesn't have the chip manufacturing expertise required for Mini PCI. "The 'Why now?' is really a function of the ramp in Mini PCI," Gates said.

I'm sure the strategic reasons for the deal are true. But for Xircom to claim that its poor financial performance had little or nothing to do with this deal is disingenuous at best.

Xircom and Intel have been partners for years. Intel owns about 6 percent of outstanding XIRC shares -- incidentally, that means the real purchase price is closer to $703 million, since Intel is paying itself $44.9 million under the deal's terms -- and the companies could easily have shared technology without a full-blown acquisition.

But with all the turmoil surrounding the PC industry, Xircom was on shakier ground. It wasn't about to go out of business -- otherwise Intel wouldn't have had to pay a premium -- but things don't look as promising for an independent Xircom as they did 11 months ago, when I mistakenly saw a silver lining beneath Xircom's clouds.

And for all the hubbub about Intel's pain, the company still has plenty of cash to throw around. That ought to be reason enough for Xircom shareholders. 22GO>