Analysts Applaud Conexant's Purchase of Maker

Conexant fell on the news, but the deal gives it a presence in the crucial ATM segment.
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SAN FRANCISCO -- Communications-chip giant Conexant (CNXT) - Get Report, which has stayed out of the chip merger and acquisition frenzy this year, finally got into the holiday spirit with a $990 million purchase of networking chipmaker Maker Communications (MAKR) .

Conexant's stock slipped 5% during Monday trading on concern that it was paying too much for Maker, which rose 23% on the news. But chip analysts who follow Conexant applauded the deal, saying that it now gives Conexant the leading position it needs in the high-growth market for asynchronous transfer-mode chips for wide-area networks.

On the face of it, $990 million seems a lot to pay for a company like tiny Maker, which will end 1999 with about $15 million in revenue. But Maker gives Conexant a presence in the high-growth ATM segment, where Conexant has no presence, says

Merrill Lynch

analyst Joseph Osha.

"Maker, it is one of the only small companies with deep expertise in ATM," says Osha, whose firm isn't an underwriter of either company. Osha rates Conexant near-term accumulate and long-term buy.

"I'm really surprised the stock is going down," Osha says. "I think it is based on the perception that Conexant will now go and overpay for companies."

Conexant closed down 3 5/16 at 66 5/16 Monday, after falling as low as 60. Maker was up 7 3/4 at 41 3/4, after rising as high as 42 5/8.

Conexant needs to break into new, growing markets. Half of the company's revenue comes from analog modems, a business that many expect to become extinct as digital modems dominate. The other half come from a diverse range of communications chip products, none of which hold the lead in their markets.

Until now, Conexant has been the only chip giant that hasn't gone on a shopping spree.

Intel

(INTC) - Get Report

and

Texas Instruments

(TXN) - Get Report

have been gobbling up small communications chip and software companies.

On a conference call Monday, Conexant CEO Dwight Decker said putting his 250-person global sales force behind Maker's ATM chips could give it a quick entry into the market. While Intel and

IBM

(IBM) - Get Report

have announced entries into the networking chip market, neither have the customer base and product lines Maker now gives Conexant, Decker said.

"We think the value of having revenues and customers and design engagements is the real competitive advantage," Decker said. "We think it is a big plus to have that reality as opposed to a promise."

Investors may also be uneasy that the $800 million of goodwill Conexant is paying for Maker will show up on its balance sheet for the next five to seven years. Conexant wouldn't say how it would account for that goodwill, but it's likely to be a mouthful. Conexant posted revenue of $1.5 billion in the year ended Sept. 30. "Fundamentally it's a good deal, but financially you have issues," says

Schroder & Co.

analyst Tim Kellis, whose company hasn't done underwriting for Conexant and Maker.

Maker is particularly strong in OC48, the largest and fastest-growing segment of the ATM market, says Elias Moosa, chip analyst at

Thomas Weisel Partners

. "OC48 is becoming the de facto standard," Moosa says. "The feeling is it will be a market of multimillion units in a few years from tens of thousands of units now."

Maker is expected to have products for OC48 -- a fiber optic networking segment where data flows on a channel at 2.4 gigabits per second -- ready by the first quarter of next year, he says, and that means that Conexant has now bought themselves solid future in the high-performance fiber optic market. Weisel is not an underwriter of Conexant or Maker.

The big competition for Conexant/Maker will not be Intel or IBM, but

PMC-Sierra

(PMCS)

, Moosa says. It remains to be seen how much market share Conexant can take from PMC.

In the stock transaction, Maker shareholders will receive 0.66 of a share of Conexant common stock for each share of Maker common stock they own. The deal has been approved by the boards of directors of both companies, Conexant said in a release.