Terayon is about to complete a private placement for spinoff I-Media, says Alex Brown

The Israeli firm wants to keep 80% of the startup, which develops silicon and software-based broadband solutions
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A research update by Deutsche Banc Alex Brown says that Terayon Communication Systems (Nasdaq:TERN) is about to complete a private placement for its brand-new fully-owned subsidiary I-Media Semiconductor.

Terayon, which provides broadband access systems for cable and phone companies, announced I-Media's establishment just a month ago.

I-Media, based in Santa Clara, California, provides silicon and software-based solutions for broadband communications. The products enable equipment suppliers to cable companies¿ including Terayon's own rivals ¿ to build products for almost symmetrical transmission of voice, video and data over broadband.

The startup's chipsets are based on DOCSIS 2.0, the data over cable service interface specification accepted as the new standard.

DB analyst George Notter writes that Terayon aims to keep a 80% interest in I-Media, and later to spin it off.

The company is so young it doesn't even have a chief executive yet, though it does have 100 employees.

I-Media will be announcing a design win in the first quarter of 2002, Notter writes, which is expected to generate revenue in the second quarter.

The I-Media name comes from Imedia, a company established in 1996 by Scitex (Nasdaq:SCIX) and Electronics For Imaging (Nasdaq:EFII) founder Efi Arazi. Terayon bought it in late 1999 for $100 million in stock.

I-Media solutions are today incorporated in the majority of Terayon modems and central cable units, including 6,000 central units of cable companies, and 2 million modems that Terayon has sold to date.

This September Terayon stepped up its DOCSIS 2.0-based developments, the new standard accepted by Cable Television Labs. Terayon says that DOCSIS 1.0/1.1 provider Broadcom Corporation (Nasdaq:BRCM) is disseminating doubt about the schedule for adopting DOCSIS 2.0, Notter writes, which he takes to indicate that Terayon will not fall behind schedule with new product launches.

Meanwhile, Notter predicts that Teryaon will continue to cut costs and staff. Terayon employed 800 as 2001 began, of whom 260 worked in Israel. Today it has only 400 staffers left, 120 in Israel.

Acquisitions in Terayon's back yard
Notter does not mention the Juniper Networks (Nasdaq:JNPR) announcement last week about buying Pacific Broadband Communications in a $200 million stock swap. Privately-owned PBC develops cable modem termination systems.

When it made its announcement, Juniper estimated that the market will grow to $1.3 billion until 2005. The consultancy firm Kagan World Media believes that the market of advanced services for cable providers could reach $52 billion by 2010.

Just today Terayon announced the introduction of the Terayon BW 3000 series of cable modem termination systems. The Terayon BW 2000 are the first in the industry to leverage the quality of service capabilities of DOCSIS 1.1 and the greater upstream performance of DOCSIS 2.0 "to enable cable television operators to offer full-motion video conferencing, voice-over-IP telephony, large file transfers and other advanced broadband services", the company said.

Other noteworthy deals in Terayon's niche include last year's acquisition by ADC Communications of Broadband Access Systems for $1.1 billion; Motorola (NYSE:MOT) bought RiverDelta Networks for $300 million four months ago.

According to a report published this August by market research firm Dell'Oro Group, Terayon controls 22.4% of the CTMS market, preceded by Cisco Systems (Nasdaq:CSCO), the market leader with 32.1% share.