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LanOptics' EZChip Strikes a Deal With IBM

IBM sweeps EZChip off its feet in an agreement to invest in and manufacture chips for the up-and-comer.

The figures in

LanOptics'

(LNOP)

report for the third quarter of 2000 brought no great tidings. Again the company reported declining sales, which are now down to a negligible level. Yet, its net operating losses grew.

But the market applauded, sending LanOptics' stock soaring. For once, there was logic in the market's madness. LanOptics' own results aside, it announced that

IBM

(IBM) - Get International Business Machines Corporation Report

has invested in, and will be producing chips for, LanOptics' subsidiary

EZChip

.

The fact that EZChip was raising money was well-known, which LanOptics reported two weeks ago. But IBM's participation was unknown. IBM's backing for EZChip is much more significant than the financing round. EZChip is a fabless, meaning it designs but does not manufacture chips.

LanOptics Is EZChip

Indeed, the agreement between EZChip and IBM is not just about investment. It is primarily about cooperating on development and production. Once the design and specifications are ready, IBM will produce and market EZChip's chips. EZChip's current dream -- to make the second generation's fastest processors -- is then one step closer to reality.

Today, Lanoptics

is

EZChip. Lanoptics' traditional LAN activity still exists, but it's shriveling up. LanOptics' second line of activity, security software with

NetGuard

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, does not seem to be taking off, to put it mildly. LanOptics still maintains it has a future. But it keeps presenting declining sales, which are far from picking up.

It follows that LanOptics' entire market capitalization, about $200 million, can be attributed to its 57% interest in EZChip. LanOptics' share in the company, based on the valuation of $80 million at which EZChip's financing was held, is estimated at $50 million. While most holding companies trade at a discount, LanOptics' large market cap is indicative of the potential investors see in EZChip.

From Giant to a Packager

Why does the market love EZChip? Because it predicts that technology is evolving in favor of chips, rather than systems. This is why companies such as

Broadcom

undefined

and

Applied Micro Circuits

(AMCC)

command tens of billions of dollars in market cap, and trade at steep multiples, even among tech highfliers.

More and more communications sector analysts, led by EZChip patron and tech guru George Gilder, who is also responsible for the rise in LanOptics' stock, claim that equipment companies will eventually become packaging companies. They believe the intelligence will all be in the chips. Gilder even predicts routers will disappear and be replaced by smart chips.

Dwight Decker, CEO of

Conexant Systems

(CNXT) - Get VanEck Vectors ChinaAMC SME-ChiNext ETF Report

, a world giant in communication chips and recent buyer of Israeli start-up

Novacom

, counters Gilder's prediction as excessive in a recent interview with

TheMarker.com

.

Decker agrees that intelligence and ability are flowing more and more in the direction of chipmakers. He doesn't believe, however, that companies such as

Cisco Systems

(CSCO) - Get Cisco Systems, Inc. Report

will become packaging companies like

Dell

(DELL) - Get Dell Technologies Inc Class C Report

or

Compaq

(CPQ)

. Decker sees these companies evolving into network builders based primarily on other companies' chips.

Pining by the Phone

In such a world, EZChip chips, which transfer data at 10 gigabytes per second, are an asset every processors company would like to have as part of its product line. These chips already exist. Soon the company's product should allow the transfer of data at 40 gigabytes a second. That capacity is as yet unrivaled.

Decker of Conexant counts EZChip as one of the most interesting companies in the sector. And Conexant is not uninterested in investing. He declines to disclose whether Conexant participated in the private financing round. Well, it didn't. Probably not because it didn't want to, but because EZChip opted for IBM as strategic partner.

For LanOptics, the alliance with IBM and the U.S. giant's investment in EZChip, read LanOptics, must feel like deja vu. Seven years ago at its Wall Street debut, LanOptics was thought to be an acquisition candidate by Cisco, and not because of its performance. The origin of these predictions was a marketing agreement the company signed with Cisco.

This acquisition never became a reality. LanOptics trudged on for years waiting for a giant company with which to partner up. A fresh round of rumors had Cisco sniffing at EZChip. But after seven years of waiting for Cisco to call, it's over. IBM showed up and carried the bride away.

TheMarker is a leading source for technology and business news information in Israel. The site is a venture backed by the Israeli daily Haaretz and TheStreet.com. For more stories from TheMarker, go to http://www.themarker.com/eng/