Updated from 2:31 p.m. EDT
In a deal that underscores the tough fight shaping up in the Wi-Fi market, the industry's leading silicon player has announced its exit from the wireless LAN business.
Market share leader
will offload its wireless LAN division to
for $365 million, in a transaction expected to close in the third quarter.
Globespan, which makes chips and software used in digital subscriber lines will pony up about $250 million in cash and $115 million in its stock for the business.
Intersil shares gained on the announcement, up 66 cents or 2.4% to $28.25, while Globespan sagged 67 cents or 7.2% to $8.60.
The deal's bargain price only shows how
fierce competition has become in the wireless LAN arena, as
muscle their way in, says Satya Chillara, an analyst at WR Hambrecht.
He says he was surprised that Intersil will pocket only around 1.5 times 2003 sales for the divestiture. Though valuations vary, a chip business might typically be expected to sell in the range of two to three times sales. And at the high end, last year
RF Micro Devices
paid between five and eight times this year's sales for Resonext.
Chillara and many other analysts offered a thumbs-up to Intersil's move, which offers a twofold benefit: besides offering a graceful escape from the wireless LAN business, it will leave Intersil as an analog pure play. Chillara's firm has no banking business with Intersil.
analog business is a perennial favorite among investors, offering fatter profit margins than the rapidly commoditizing wireless LAN space.
At U.S. Bancorp Piper Jaffray, analyst Tore Svanberg notes the sale will immediately boost Intersil's gross margins by a few percent. In the most recent quarter, he estimates Intersil's margins at around 55% to 57% without the WLAN business.
By comparison, the WLAN business by itself carried margins in about the 48% range (assuming it chipped in about 30% of sales).
In announcing the deal, Intersil talked up its prospects on the analog side. "This transaction completes our transition to a pure high performance analog company," said Intersil CEO Rich Beyer. He said that in the first half of 2003, the company's analog business grew 10% year-on-year, approaching an annual revenue run rate of $500 million.
To put that in perspective, Intersil's wireless networking group claimed an annual run rate of around $200 million, based on first quarter sales of $49 million.
"I think Intersil is building a very good analog business that could start to look more similar to what
do," says Svanberg. To be sure, even after it sells the WLAN business, Intersil will remain less diversified and less profitable than those two analog chipmakers (which boast margins in the 70% range). But Intersil has still made plenty of progress since coming public in 1999, Svanberg says.
Back then, its revenues were roughly split in three parts among its analog, WLAN and discrete business. But in 2001, it sold off its discrete business to Fairchild and last year it bought Elantec, an analog company. With the latest WLAN sale to Globespan, the business is now 100% analog.SUBHEAD: A Timely Exit
Intersil exited 2002 with a 52% share of the wi-fi chip business, but likely would have seen its share drop to around 48% by the end of this year, estimates Chillara.
"Intersil was weakening," says Ken Dulaney, vice president of mobile computing at Gartner. "Everybody else around had either innovated at their level or beyond."
In both of the two primary markets for Wi-Fi chips -- the cards or embedded silicon that are used within notebook computers, and access points ? Intersil was falling behind, says Dulaney. "With Intel producing Centrino
for notebooks and some of the high-end stuff being done by Broadcom and Atheros, they were left without a good plan going forward. So it was probably a smart move on Intersil's part to dump this business."
To be sure, after the sale Intersil will initially give up a little in earnings, given that wireless LAN contributed around 20% of Intersil's profits in the first quarter. Analysts say are waiting to hear Intersil's second quarter numbers before formally revising their earnings estimates. Still, Svanberg says the net effect will likely be positive after accounting for the cash inflow from the sale.
USB has either done banking in the past year or will try to sell banking to ISIL within the next three months.
Yet investors warming to Intersil's makeover should consider a potential catch: valuation. Intersil's stock has been rising over the past few weeks, helped along by prescient rumors about the sale of its WLAN business. Chillara says he thinks Intersil deserves to trade at around $28 to $30 ? a range that leaves precious little upside.
On a separate front, Intersil also confirmed second quarter guidance that it updated in late April, when it said it had seen increasing strength in orders. The company added that earnings are likely to reach the high end of the 15 cent to 16 cent range it predicted at the time.
Intersil reports earnings on July 23.