Chipmaker Conexant to split in two

The Newport Beach, Calif.-based chipmaker said today it will split into two companies, spinning off its network access division, which makes chips for the Internet infrastructure market. The remaining company will house all of Conexant's other chipmaking businesses including semiconductors for cell phones, modems and other consumer electronics.

Conexant said it will spin off the Internet infrastructure chip company in a two-step process. The first step, targeted for January, will be an initial public offering of less than 20 percent of the company's stock in the new company. This will be followed within six months by a tax-free distribution of the remaining shares to Conexant shareowners.

The split was announced after market close, sending Conexant up $6.44 to $43.59 in after-hours trading on a volume of 534,900 shares. During regular trading today, Conexant rose $3.31 to close at $37.06, with all of the gain coming in the final 90 minutes of trading.

Completion of the spinoff is conditional upon receiving an Internal Revenue Service ruling that the move qualifies as a tax-free distribution.

SG Cowen analyst Rick Billy said the network access unit being spun off is clearly the attractive part of the business. Accordingly, that unit should should fetch a higher price-to-earnings multiple than the existing Conexant. However, Billy said, the remaining business will probably get a lower valuation.

"Obviously, what they expect will happen here is that the two pieces will be worth more than the the whole," Billy said. While a somewhat higher total value is possible, Billy said it is not as if the existing Conexant was suffering from a low valuation.

"It's going to extract some value, but it's not like it's going to double," Billy said.

In a conference call, Conexant chairman and CEO Dwight Decker called the split a "strategic imperative."

"In spinning off our Internet infrastructure business, we will immediately create a new...powerhouse," Decker said.

In the coming months, Conexant plans to announce which business will keep the company name, as well as the management and directors for each entity.

The company's wafer fabrication plants will remain with the modem and wireless business, making the Internet networking chipmaker "fabless."

About 70 percent of the network infrastructure chips are produced outside Conexant.

The two companies plan to sign a deal that would allow the network access unit to continue to get some of its chips produced by the Conexant plants. Such an arrangement would also call for joint development of digital signal processing cores as well as combined marketing in some areas.

Conexant said 1,200 to 1,500 of its 8,000 workers would go to the network access company, with the rest working for what Conexant is calling the "personal networking" company.

Decker said sales in the network access division, the unit being spun off, have doubled in each of the past two years.

"In the past eight months, we have augmented our strong internal product portfolio development with six acquisitions to build an Internet infrastructure powerhouse capable of approaching $1 billion in revenues over the next calendar year," Decker said.

That unit's largest customer is Cisco, with Nortel Networks and Lucent comprising the next two largest customers.

As for the other part of the business, Decker said its sales are expected to exceed $1.5 billion in the company's current fiscal year, accounting for about 70 percent of its total revenues. That unit has grown at about a 28 percent annual rate in the past 18 months, Decker said, and should grow in the range of 30 percent a year during the next several years.