Parsing the Logic Behind Intel's Purchase of DSP Communications - TheStreet

Parsing the Logic Behind Intel's Purchase of DSP Communications

The U.S. chipmaker is paying big bucks for a tiny player -- and for DSPC's phalanx of high-tech engineers.
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JERUSALEM -- Folks at DSP Communications (DSP) , the Israeli chipmaker that Intel (INTC) - Get Report agreed last week to buy for $1.6 billion in cash, are still atwitter over the big event. I sat down Monday evening with three top executives at DSPC's Israeli R&D headquarters in the Tel Aviv suburb of Givat Shmuel, and two things became abundantly clear. One is that this is a group of really talented people who've been successful in a brutally competitive industry -- the market for designing chipsets for cellular telephones. The other is that Intel is paying a boatload of money for a tiny player with limited inroads into global cellular markets. In short, Intel is buying a group of smart engineers it may or may not be able to retain.

"Intel put one and one together" and realized the value of connecting a billion computers, says Gabriel Hilevitz, executive vice-president and general manager of

DSPC Technologies

, the company's Israeli R&D arm. The billion he's talking about is the billion "platforms" Intel believes will be connected to each other in the not-so-distant future. In other words, Intel recognizes that, as growth in personal computers slows, it must move into so-called information appliances, many of which will have wireless components to them.

The problem is that its acquisition of DSPC won't accomplish this goal in one fell swoop. DSPC is focused on one market, cellular-telephone handsets, and it gets the bulk of its revenue from one technology, the so-called PDC cellular standard used only in Japan. Annualized revenue is about $150 million. Yes, the company has expertise in digital signal processing, the sweet spot of the chip industry that

Texas Instruments

(TXN) - Get Report

and

Lucent Technologies

(LU)

also are targeting. But so far, it has won only a sliver of the cellular market, and if Intel is to become a giant in devices, its new DSPC employees will have to refocus their attention, and quickly.

From the talk on this side of the world, Intel has bought the right team. Eli Fogel, an ex-

Motorola

(MOT)

executive who's now chief technical officer of DSPC, notes that the company's annual turnover has been about 3%, not all of it voluntary. That's an extremely low churn rate for a 300-employee company, most of whom are engineers.

Can Intel keep these employees happy? Hilevitz, noting that DSPC's employees already have generous stock-option packages, insists that Intel "will not disturb this balance." He adds: "That's the declaration we got from Intel." It might be a good idea to check back with DSPC this time next year and see if employee turnover remains at 3%.

Incidentally, given that Intel's tender offer for DSPC is set to begin later this week, it's interesting that the stock is trading steadily so far below Intel's offer price of 36. DSPC opened and closed Monday at 35 1/16, nearly a buck per share below what Intel is offering to pay.

Adam Lashinsky's column appears Mondays, Wednesdays and Fridays. In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in TheStreet.com. He also doesn't invest in hedge funds or other private investment partnerships. Lashinsky writes a column for Fortune called the Wired Investor, and is a frequent commentator on public radio's Marketplace program. He welcomes your feedback at

alashinsky@thestreet.com.