HotRail Climbs Aboard the Tech Acquisition Express Train - TheStreet

HotRail Climbs Aboard the Tech Acquisition Express Train

With cash and highly valued stock as incentives, semiconductor giants seduce small start-up tech companies like HotRail away from the public market.
Author:
Publish date:

SAN FRANCISCO -- When semiconductor start-up

Poseidon Technology

changed its name to

HotRail

this summer, it was with an eye to grooming itself for an initial public offering.

It's turning out that it may never make it to the public markets. "I had to go back to my board and say there is a good chance we will get acquired," says CEO Rick Shriner. In recent months, HotRail, which isn't expected to generate sales until next year, has turned down one formal acquisition bid and has received feelers from at least four other companies.

It's probably more than the company's nifty new name. HotRail is just one of a myriad of small start-ups likely to get swallowed soon by large-chip companies with cash and highly valued stock to offer. Big players like

Texas Instruments

(TXN) - Get Report

,

Broadcom

(BRCM)

,

Vitesse

(VTSS)

and

PMC-Sierra

(PMCS)

are grabbing for chip ventures to ensure a large stake in the lucrative markets of networking and communications. In this respect, HotRail is a prime target because it's developing a device that connects multiple processors for high-performance computing and networking.

Silicon Valley is crowded with start-ups ripe for picking, among them

NeoParadigm Labs

,

TeleCruz Technology

,

SandCraft

,

DynaChip

,

Tripath Technology

,

SiRF Technology

,

Centillium Technology

and

Microtune

, all of which have been heading toward IPOs.

Ken Hao, an investment banker at

Hambrecht & Quist

, says the appetite for acquisitions is so fierce, most of these companies will never make it to the public market. Hao estimates there will be more semiconductor acquisitions in 1999 than in the previous five years combined. "There is no question in my mind that more start-ups will be acquired by leading companies in the semiconductor space than will go public," Hao says. "For every four, three will get acquired."

Because of the growth of the Internet, the markets for networking and communications chips are growing fast while the market for PCs is slowing, Hao says. "The M&A activity in device areas are driven by companies wanting to position themselves for this Internet access revolution over the next three to five years," he says.

Shriner believes the chip giants may see the communications market as a way to stave off the cyclical nature of the industry.

But if communications chipmakers want HotRail, they might have to act fast. That's because the tiny company is caught in another swirling battle: A 30-year fight between PC chipmakers

Advanced Micro Devices

(AMD) - Get Report

and

Intel

(INTC) - Get Report

, which is spilling over to the growing market for servers that run the Internet.

Shriner wouldn't name names, but says that one suitor at least is a microprocessor giant. But Nathan Brookwood, an analyst at technology research firm

Insight 64

, says HotRail's technology would help Intel in future chip designs and would also fit in with Intel's overall transition away from desktop computers to

networking systems. (Insight 64 performs consulting services for both Intel and AMD.) An Intel spokesman says the company does not comment on possible or pending acquisitions.

AMD has always been seen as a potential buyer, Shriner says, because HotRail's product was originally designed for AMD chips. With HotRail technology, AMD's new Athlon processor could be used to make high performance servers at a very low cost, and thrust it into a segment of the server-chip market Intel all but owns. Shriner acknowledges that it's entirely foreseeable that "someone" might acquire HotRail just to keep AMD at bay. "We are the only symmetric microprocessor chipset for the AMD K7," Shriner says. "We are a pawn. What happens to pawns? They get moved."

The temptation for start-ups to sell out now is hard to resist, Shriner says, because purchase prices are shooting out of control. He points to the pending sale of

Abrezio

to PMC for $427 million worth of stock. That's a price tag that is 2.6 times PMC's 1998 sales, for a company with no product and just a small cadre of top engineers designing chips for voice and data networking. Then there was the sale of home networking chipmaker

Epigram

to Broadcom earlier this year. The initial value of the stock offer was about $300 million, but when the deal closed, the increase in Broadcom's stock value shot the price up to $600 million.

The IPO market could potentially be as lucrative or even more so, says Hao, but comes with greater risk. Consider that network chipmaker

NETsilicon

(NSIL)

went public Wednesday with an offering price of $7 a share. It closed at 12 3/8 that day, giving the company a market cap of $163 million.

"I want to go the IPO route," Shriner says. "But venture capitalists are looking at how much money they can make."

Semiconductor stocks have been on a yearlong rally since bottoming on Oct. 8, 1998. To review the events of the past year in semiconductor stocks like Intel and

Rambus

(RMBS) - Get Report

and to discuss where the sector is heading,

TheStreet.com's

Marcy Burstiner

will host an informative chat on Yahoo! on Thursday, Oct. 7, at 5 p.m. EDT. Register for Yahoo! Chat at

chat.yahoo.com. It's free!