Broadcom Drops After Dumping Head of Server Chips

Shares of Broadcom ( BRCM) took it on the chin today after the company abruptly replaced the head of its server chip unit, citing arguments over strategy.

The news prompted two analysts to downgrade their ratings on the stock, saying the top-level dismissal could lead to other departures and give Intel ( INTC) an edge in the server chipset business.

In midafternoon trading, Broadcom stock fell $2.24, or 14.5%, to $13.16. Volume was heavy, at 28 million shares, or more than three times the normal trading. On a day that many tech stocks ebbed into the red, Intel was off slightly, down 21 cents, or 1.2%, to $17.68.

After the close Wednesday, the communications chipmaker said it will replace Raju Vegesna, the head of its ServerWorks subsidiary. Vegesna was co-founder and CEO at the time Broadcom acquired the unit in 2001. In an unusually blunt statement, CEO Alan "Lanny" Ross noted disagreements between management at Broadcom and ServerWorks "over a number of operational issues and the strategic direction of ServerWorks and how the business fits into Broadcom's long-term plans."

As a successor to Vegesna, Broadcom tapped Duane Dickhut, leader of Broadcom's broadband processor unit.

The ServerWorks subsidiary, which makes server chips, accounts for about a quarter of Broadcom's revenue and profits.

Wall Street reacted to the sudden management change with concern, particularly because it comes after other worrisome events at Broadcom. Since January, rattled investors have witnessed the exit of Broadcom's longtime CEO Henry Nicholas , as well as the head of investor relations. The company also recently suffered a loss in a patent lawsuit brought by Microtune ( TUNE).

Though analysts generally sounded upbeat on Broadcom's near-term business prospects, predicting revenue growth in the current quarter, they cast the latest development as one more element of uncertainty that Broadcom certainly doesn't need.

Morgan Stanley analyst Mark Edelstone downgraded the stock from overweight to equal weight; his firm hasn't done any recent banking for the company. "Any mis-execution within the ServerWorks business unit could enable Intel to close the competitive gap that has existed in core logic I/O chipsets for servers," he cautioned in a note. Morgan Stanley doesn't have a recent banking relationship with Broadcom.

At Wedbush Morgan, David Wu slapped a "sell" rating on the stock, downgrading it from a hold rating. "Our fear is that the majority of the top technical design architects who have been close to the founder will leave with him, which should hurt Broadcom's revenues and earnings beyond the current first quarter (most likely beginning in the second half of 2003, as we believe design wins for the second quarter are mostly determined now)."

Wedbush hasn't done recent banking for Broadcom.

Many ServerWorks employees are loyal to co-founder Vegesna, besides, Broadcom has the reputation of underpaying its employees in cash compensation, said Wu.

He estimates ServerWorks owns around 80% of the server chipset market today, but notes that Intel has been winning designs and aggressively competing with new chipset generations due to roll out next year.

Intel will "take advantage of this opportunity to gain share from the major PC OEMs by creating fear, uncertainty, and doubt about ServerWorks future product roadmap," Wu concluded.

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