Updated from 10:24 a.m. EDT
PMC-Sierra
(PMCS)
will continue to tarry on its merging way, saying early Wednesday that it planned to acquire yet another semiconductor company,
Quantum Effect Devices
(QEDI)
, for stock valued at $2.3 billion.
Under the proposed deal, PMC-Sierra, a maker of semiconductors for communications and networking equipment, would exchange 0.385 of its shares for each Quantum share. Based on Tuesday's closing stock prices, the swap would value microprocessor maker Quantum at $75.63 a share, a 25% premium over Quantum's share price.
That premium rose to 32% Wednesday, as PMC-Sierra's shares finished up 11 5/8, or 6%, at 208 1/16 in afternoon trading. Meanwhile, Quantum's shares closed up 18 7/16, or 30%, at 78 15/16.
"PMC-Sierra's goal is to be a one-stop shop in networking semiconductors. This certainly is a step in achieving it,"
Merrill Lynch
analyst Joseph Osha said.
Quantum develops and sells open microprocessors, or MIPS, used primarily in communications equipment. When phone and Internet companies then need customized applications, they can outsource semiconductor chips to PMC-Sierra, which designs software to work with the client's open processor.
In many companies' systems, PMC-Sierra software runs on a Quantum processor, and chips from each provider sit side by side.
Acquiring Quantum would fill what
Bear Stearns
analyst Charles Boucher called a "gaping hole" in PMC-Sierra's technology portfolio: PMC-Sierra lacks Quantum's networking processors. Bear Stearns has a buy rating on PMC-Sierra. The firm has no underwriting relationship with PMC-Sierra.
Furthermore, the acquisition would build on ground already shared by the two companies. All of Quantum's clients are also PMC-Sierra customers, Cisco being the largest for both, and a 5% owner of Quantum. PMC-Sierra can sell Quantum's processors to the remainder of its existing customer base.
The proposed acquisition is the latest by PMC-Sierra, which recently agreed to acquire
Datum Telegraphic
, a privately held wireless chip company, and
Malleable Technologies
, a semiconductor developer. The company acquired four companies in the last four months.
"PMC-Sierra has been piecing together over the past year the industry's broadest and deepest wide-area network chipset and networking portfolio," said
BofA Montgomery
analyst Alex Gauna, who has a strong buy rating on PMC-Sierra. BofA Montgomery has not done any underwriting for PMC-Sierra.
But because Quantum is an open processor, any company that takes a MIPS license can compete to provide products to work with Quantum.
"I think the advantage going forward is that more and more things get integrated into a single piece of silicon," said John Sullivan, PMC-Sierra vice president of finance and chief financial officer. PMC-Sierra would control the architecture of both Quantum's chips and its own, designing each set to work especially well with the other. "It's important that
Quantum's chips and our chips talk seamlessly."
A number of communications chip companies are buying networking processor companies in order to have a more complete package for their customers, Boucher said.
But while
Conexunt
acquired
Maker Communications
for about $943 million,
Lucent
(LU)
bought
Agere
for $415 million, and
Vitesse
(VTSS)
paid $750 million in stock for
SiTera
, PMC-Sierra bid $2.3 billion for Quantum, Gauna noted
"So they have clearly
offered a premium," Gauna said, "and it will remain to be seen whether the technology and the marketplace live up to the expectations."
PMC-Sierra said in a conference call Wednesday that it believes it can build its revenue to $1 billion by 2005.
"If there is any company in the broadband semiconductor industry that can do that, it's PMC-Sierra, because they have the industry's leading team of field applications engineers," Gauna said.
After the proposed acquisition, Santa Clara, Calif.-based Quantum and its roughly 100 employees would be a unit within Canadian-based PMC-Sierra. Tom Riordan, Quantum's president and chief executive, will report to Bob Bailey, PMC-Sierra's chairman and chief executive, as vice president and general manager of the division.
