Updated from 1:26 p.m. EST

Shares of heavily shorted penny stock

Conexant

(CNXT) - Get Report

sprung to life after the company said it would again try to spin off a money-losing unit that sells networking chips to telecommunications firms.

Conexant shares, which treaded water for about two hours after the spinoff was disclosed, shot up at noon and recently traded hands for $1.70, up 23 cents, or 16%, on about twice its normal volume. Conexant tried to spin off the unit, Mindspeed, in 2001 but pulled the deal because of market conditions.

The stock jumped because Conexant got rid of a money-burning unit, according to Kalpesh Kapadia, senior semiconductor analyst at C.E. Unterberg, Towbin. "They went from worse to bad. But it's still not good," he said.

Conexant, which will focus on home and small-business broadband chips after the spinoff, will provide $100 million in initial funding to Mindspeed after separating it via a dividend this summer. It will also make $50 million of contingent financing available.

A note by Standard & Poor's might have contributed to the buying. The rating agency noted that without Mindspeed, Conexant posted an operating profit in the last quarter of 2002, and is expected to break even in the recently completed quarter on at worst a small decline in revenue. Mindspeed, on the other hand, isn't profitable, S&P noted, although Conexant predicted it would be by the end of 2004.

Still, S&P said, Conexant will retain all its debt after the spinoff: about $759 million, including capitalized leases.

"This decision represents the final step in Conexant's transformation from a broad-based communications supplier into a family of focused, pure-play semiconductor businesses," said Dwight W. Decker, Conexant's chairman and chief executive officer. Decker said that after a $215 million early debt repayment in its last quarter, the company was on solid financial standing to run both companies.

C.E. Unterberg's Kapadia expects another $50 million to $60 million in cash burn and restructuring charges in the next two quarters, leaving Conexant with $240 million in cash but still $737 million in debt.