Nvidia's Plan to Shut Down or Sell Its Icera Unit Follows a Well-Worn Path

NEW YORK (The Deal) -- Chipmaker Nvidia (NVDA) is examining options for its Icera business, but with no buyers at the table, a shutdown appears to be the most likely outcome for the mobile processor unit, according to company followers.

Nvidia announced on May 5 that it would wind down its Icera operation in the second quarter of fiscal 2016, though the company is open to a sale of the unit or the technology.

Nvidia reported quarterly results Thursday evening, and in a conference call, management said the planned wind-down or sale of the Icera unit would result in restructuring charges in the range of $100 million to $125 million, primarily during the company's 2016 fiscal year.

For Santa Clara, Calif.-based Nvidia, which has a market capitalization of about $12.2 billion, the decision comes nearly four years after it acquired the producer of baseband processors for approximately $367 million. Baseband processors are chips on mobile devices, such as cellular phones and tablets, that manage communication functions.

"If you look at Broadcom (BRCM), it's a good benchmark," said Betsy Van Hees, senior vice president of equity research at Wedbush Securities, referring to Broadcom's decision to shut down its cellular baseband business last year following a strategic alternative process.

While the unit was a "very viable asset" with significant customers, Broadcom wasn't able to find a buyer, Van Hees said.

Irvine, Calif.-based Broadcom, also a semiconductor maker, initially announced in early June that it had engaged JPMorgan Chase's (JPM) J.P. Morgan Securities to explore strategic options for the baseband business, including a potential wind-down or sale. Broadcom then said in July that it chose to shut down the unit.

"I think it's more than likely that we'll see the same scenario play out at Nvidia," she said, referring to Icera.

"It's just because that end market is locked up by a few players," Van Hees said, citing mobile chipmakers such as MediaTek, Qualcomm (QCOM) and Marvell Technology (MRVL). "It's a very difficult place to sell an asset like that."

Van Hees explained that it was a big decision for Nvidia to go into the baseband market, which she said was a "very big diversion to their core DNA."

"To constantly be able to reinvent and stay ahead of the curve is very difficult," she asserted. "They definitely put the time and effort in the investment. They gave it everything they could."

Several Nvidia rivals have decided to exit their cellular modem business, said Raj Gill, managing director of semiconductor equity research at Needham & Co.

In addition to Broadcom, Texas Instruments (TXN) exited its mobile chip business in 2012 while Freescale Semiconductor (FSL) got out of the cellular chip market in 2008.

(The Netherland's NXP Semiconductors (NXPI) agreed in March to acquire Freescale in a deal valued at nearly $17 billion.)

"Whether they're going to be able to find a buyer -- I doubt that," Gill said.

Like others, he sees the most likely scenario being Nvidia closing down the unit, especially since Broadcom's mobile chip assets were much stronger than Icera's and yet it ultimately mothballed them.

The valuation of Icera's business had already been going down when Nvidia obtained it in hopes of competing against Qualcomm head to head, Gill pointed out.

"Nvidia officially saying that they're going to sell or close down Icera is a good thing," Gill said.

The baseband market continues to be a competitive space as Qualcomm holds on to its dominant market share and global conglomerates such as Samsung Electronics and Huawei Technologies start to develop chips internally, he added.

Next to depart from the baseband processor business could be Marvell, Gill said.

Icera was becoming less and less strategic for Nvidia, said Craig Ellis, senior managing director at B. Riley & Co.

"I do believe that they are committed to redirecting the R&D intensity that currently exists in that business toward other businesses where ... growth margins are far better," Ellis said.

He explained that when Nvidia acquired Icera in 2011, the landscape in mobile was vastly different from what it is today.

"It was much less clear who would be the ultimate winner," Ellis added.

While Nvidia's acquisition of Icera was reasonable when considering the market share the company had with its Tegra system, the mobile chip business hasn't been a place where it has had steady success, he added. (Tegra refers to Nvidia's system-on-a-chip processor, which integrates various components of a computer into a single chip.)

Nvidia representative Robert Sherbin wrote in an email Thursday that while the company is open to selling the technology or the operations, "the interested party will have to have genuine interest and move quickly" since the chipmaker has a "specific wind down table."

"Our company strategy has been reshaped to focus on high growth opportunities where our visual computing expertise is greatly valued -- areas like gaming, auto, enterprise and cloud computing," he added.

Shares opened sharply lower Friday following the company's earnings report. Shortly after 10:00 a.m. EDT Friday, the stock was down $1.16, or 5.2%, at $21.33. Shares had fallen in after-hours trading late Thursday.

The company reported earnings of $134 million, or 24 cents a share, on revenue of $1.15 billion, for its first fiscal quarter of 2016.

Adjusted earnings per share were 33 cents, which was better than the average analyst estimate of 26 cents, but revenue was less than the $1.16 billion analysts were expecting.

The company's outlook for the current quarter also fell short of analysts' estimates. Nvidia said it expects to report revenue of $1.01 billion, plus or minus 2%. Analysts were forecasting $1.18 billion.

Chipmakers have been a dealmaking bunch of late.

Acquisitive Microsemi (MSCC) bought Vitesse Semiconductor (VTSS) for $389 million in April.

Meanwhile, Integrated Silicon Solution (ISSI) agreed in March to be acquired by a consortium of Chinese private equity firms led by Summitview Capital. The Milpitas, Calif.-based chipmaker is holding a special meeting of its shareholders in June to consider and vote on the proposed acquisition, which was announced just four months after Jeffrey Smith's Starboard Value LP launched an activist campaign.

In March, Cypress Semiconductor (CY) and Spansion completed their merger valued at $5 billion.

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