Broadcom chief executive Henry Nicholas said Spice's architecture for communications processors, which enables banks of chips to be replaced with a single piece of silicon, is Broadcom's most strategic buy yet and opens a "multibillion-dollar" opportunity.
"This is kind of the holy grail of carrier-class communication equipment," Nicholas said. "What Silicon Spice has created is a whole new computational element of the same significance of what the microprocessor was to the PC."
The deal is Broadcom's largest ever. It is the seventh acquisition the company has announced this year and its 12th since last year.
Silicon Spice is headed by Vinod Dham, who was one of the architects of Intel's Pentium chip. Later, Dham worked on the K6 for Advanced Micro Devices. Dham joined Silicon Spice in April 1998.
Mountain View, Calif.-based Silicon Spice had an early investment from Cisco Systems, which is also one of its customers. Nicholas said Silicon Spice has working silicon but did not discuss specific products.
Venture firm Kleiner Perkins Caufield & Byers is another Silicon Spice investor. Kleiner partner Vinod Khosla has been involved in some of the larger communications processor deals in the past year, including Cisco's $6.9 billion purchase of Cerent and the $4.3 billion acquisition of Siara by Redback Networks.
Nicholas said many of today's systems that allow voice calls to be handled over packet-based networks require boars with up to 16 digital signal processors, while Silicon Spice's approach uses just one communications processor. This results in equipment that uses less power and takes up less space.
Robertson Stephens analyst Arun Veerappan said the opportunity to convert voice traffic to packet-based networks is prompting a flurry of acquisitions. In June, PMC-Sierra agreed to buy Malleable Technologies, and GlobeSpan announced in May that it was buying iCompression.
"This market is really heating up, and all the big companies are coming in to acquire pieces of real estate," Veerappan said.
The move should help move Broadcom, which specializes in chips that enable individuals and companies to access broadband networks, to move deeper into the network.
"It gives them a foothold into the central office," Thomas Weisel Partners analyst Jeremy Bunting said. There you need the ability to handle a lot of traffic on a single chip, which is the strength of the Silicon Spice architecture, Bunting said.
The deal, which is expected to close in the third quarter, will initially dilute earnings for Irvine, Calif.-based Broadcom but should add to them within a year, Nicholas said.
Nicholas said that Silicon Spice could easily have had a hit public offering this year had it not wanted to join Broadcom.
"Silicon Spice could have been the most successful public offering of this year," Nicholas said. "I think it is a testament to what we've built here at Broadcom. I feel honored."
Dham said being acquired by Broadcom will allow Silicon Spice's technology to be used more broadly. In addition to its current target markets, such as one for gear that allows company phone systems to connect to the Internet, Broadcom plans to use the underlying technology in third-generation wireless base stations and digital subscriber line access multiplexers.
Broadcom chief technical officer Henry Samueli told CNET News.com earlier this year that the company would continue aggressively buying companies as it looks to double its employee head count in 2000, as it did in 1999.
Nicholas would not say how many people the company will add this year but added that "we don't see our growth abating."
Acquiring so many companies is a challenge, but Nicholas said the key is finding companies with strong leaders in place.
"When we acquire companies, in many of them, the acquisition is really driven by the fact they have CEOs that are eminently capable," Nicholas said. "As part of the transaction, we actually expand their responsibility."
For example, Dham will remain with Broadcom as head of a new carrier access business unit that will include Silicon Spice, as well as the voice-over-Internet Protocol software business that grew from Broadcom's acquisition of HotHaus Technologies.
While at Silicon Spice, Dham was tapped by the Federal Trade Commission to testify in an antitrust case against Intel. However, the case was settled in March 1999.
Industry analyst Will Strauss said he expects Broadcom to announce soon that Silicon Spice chips will be used in gear from Cisco and Nortel Networks. Strauss, president of Forward Concepts, predicts the products themselves will begin showing up early next year.
Strauss added that the market for the types of chips Silicon Spice makes is growing at 70 percent to 80 percent a year as the emerging voice-over-Internet Protocol market gains steam.
"It will grow as, over the next 20 to 30 years, the circuit-switched telephone network slowly evolves to a packet-based network," Strauss said.