Intel Extends its Mobile Strategy

Why would Intel buy a money-losing chipmaker with shrinking sales?
Joseph RadiganJanuary 16, 2001

(Editor’s note: “Today in Technology,” will cover the corporate technology market on a daily basis. Comments are welcome. Send E- Mails to [email protected])

When Intel announced its $748 million acquisition of Xircom Monday afternoon, it seemed to fill a gap in the company’s product line.

The deal puts the company on a course to roll out a set of products that will, among other things, connect notebooks and other mobile devices to corporate networks, something that has steadily become more of a priority for the chip giant in the last 12 months.

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But Intel is also getting a company that has taken its share of hard knocks this year: Xircom’s results have disappointed the Street for the last several quarters. For example, half an hour after the news release about the acquisition hit the wires, Xircom announced that its sales for the first fiscal quarter of 2001, ended Dec. 31, shrank to $120.1 million compared to $124.1 million in the year-ago period.

What’s worse, Xircom lost $2.5 million in the quarter. In the year ago period, the company reported a profit of $17.4 million.

During 2000, according to Bloomberg News, it became apparent that demand was shrinking for the company’s communications adapter cards as notebook manufacturers have been building communications capabilities directly into their computers.

By the fall, Xircom was ready to release its Rex personal digital assistant, a product it acquired a year ago from Franklin Electronic Publishers. But Xircom is facing off against some much larger rivals in the PDA market, including Palm Inc.

Xircom’s PDAs have also been plagued by the industry-wide shortage of flash-memory chips, which has led the company to limit availability of its PDA products.

Still, Intel has made it clear that the mobile market is a top priority. Just a week ago at the Consumer Electronics Show in Las Vegas, Intel CEO Craig Barrett outlined the firm’s Extended PC strategy, part of which incorporates wireless connections for linking PCs to the Internet.

Even if it’s assumed that Xircom is a perfect fit for Intel, it still begs the question whether there will be a return on this investment in the short term. That’s far from clear. Not only are Xircom’s products struggling to find some traction, but sales across the broader semiconductor and mobile communications sectors are expected to be no better than flat this year.

One sign of the weakness in the semiconductor market is the string of earnings disappointments that have plagued Intel since mid-2000. Then, Monday afternoon, Motorola said it was shutting down the cell-phone manufacturing operation at its Harvard, Ill., factory.

But Intel’s faith in Xircom’s prospects is strong enough to lead it to offer $25 share in cash, a 38 percent premium to Xircom’s closing price of $18.06 on Friday, Jan. 12.. Intel is also assuming all vested and unvested options of Xircom employees.

Despite the rough times in the semiconductor market, Intel is hardly the only active acquirer out there. A week ago, Broadcom, a maker of data communications chips for networks, said it will buy privately held ServerWorks Corp. for $957 million. ServerWorks makes semiconductors that move high-bandwidth data in and out of network servers.

The acquisitions suggest that as bleak as the semiconductor sector looks for the time being, the leading companies in this space are placing their bets for the eventual turnaround. We’ll just have to wait to find out if these bets were the right ones.