ANALYST WATCH: Conexant riding high for now

Wall Street analysts gave Conexant Systems a unanimous thumbs-up this week after it announced it would spin off its Internet software and semiconductor business into a separate company.

Investors were equally supportive, pushing up Conexant (Nasdaq: CNXT) shares more than 35 percent Thursday.

Company officials said the move will allow it to spend more time and resources to develop chips used in mobile phones, set-top boxes and high-speed Internet modems.

"We have created two very strong semiconductor businesses targeting markets that are quite different in many respects," said CEO William Decker. "Creating two separate companies will unleash both to realize their full potential."

Developing new technology may be a part of the reasoning behind the move, but the impending initial public offering of the Internet infrastructure business will bring in hundreds of millions of dollars alone.

It's a cash grab. Pure and simple.

Conexant will offer shares of the newly formed business in January. Six months later it will dish out shares to Conexant shareholders. While the details are still being worked out, Conexant shareholders are likely to get one share of the new Internet-centric firm for each share they hold in the original company.

But let's take a closer look at the motivation behind the spin-off.

This stock has been struggling in the past six months, falling to a 52-week low of 26 1/2 in August. It's been hovering below $50 a share since mid-July while other chip stocks have continued to move higher in the face of growing demand.

We've seen this before from the likes of 3Com Corp. (Nasdaq: COMS) with its Palm (Nasdaq: PALM) spin-off and from Hewlett-Packard (NYSE: HWP) with Agilent Technologies (NYSE: A).

It says here this deal will more closely resemble the former than the later.

3Com shares soared ahead of the Palm IPO, only to collapse immediately after the offering. More important, the Palm IPO inspired much buzz and excitement but ultimately took most retail investors on a ride they'd prefer to forget.

Analysts were quick to point out the positives of this deal, mainly because they're among the handful of people most likely to cash in on the deal.

"The Internet infrastructure business, in our opinion, represents Conexant’s fastest-growing business, focused solely on the rapidly growing communications semiconductor market," said Arun Veerappan, an analyst at Robertson Stephens, in a prepared release. "In our opinion, the spin off of the Internet infrastructure business will likely unlock significant value from Conexant’s stock and we believe that this was the primary motivation for the company to initiate such a transaction."

SG Cowen analyst Rick Billy upgraded Conexant to a "strong buy" from a "buy" while Merrill Lynch's Joseph Osha reiterated his "near-term accumulate" and "long-term buy" ratings, saying the spin-off plan "makes sense."

Keep in mind, Conexant didn't exactly set the world on fire in its third quarter when it managed to meet analysts' estimates, earning $51.5 million, or 22 cents a share, on sales of $530.5 million.

Its outlook, at the time, was shaky at best.

It predicted its operating income will decline by 10 percent in the fourth quarter, as a result of increased research and development investments associated with recent acquisitions. It also projected revenue growth of 6 to 8 percent, with significant contributions from its networking and digital infotainment businesses.

First Call Corp. consensus expects it to earn 18 cents a share in its fourth quarter and $1.08 a share in fiscal 2001.

Obviously, this spin-off makes sense for Conexant and those firms who will be leading the IPO.

But investors who are buying Conexant for the sole purpose of getting their hands on shares of the new company might want to take a look at 3Com's chart for the past six months.

You can't say you weren't warned.