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Chips Stack Up In Vitesse Deal

The acquisition of Vitesse Semiconductor Corp. by a Southern California competitor sets the stage for the combined company to play a role in building the emergent “Internet of Things.” Microsemi Corp. in Aliso Viejo is paying $389 million, or $5.28 a share, for Vitesse, headquartered in Camarillo. That price represents a 36 percent premium over the previous day’s close. The transaction announced March 18 is expected to close by the end of June. Vitesse produces integrated circuits for telecommunications carriers, Internet service providers and corporations to support voice and data networks. But in the past year the company has positioned itself to supply hardware for the “Internet of Things” – a term used to describe communications between devices – opening up new industrial and consumer applications. Microsemi supplies integrated circuits to defense, aerospace and energy clients. So the logic of the deal is to combine Microsemi’s contacts in the military and industry markets with Vitesse technology to deliver circuits for machine-to-machine communication. Representatives for Vitesse and Microsemi did not return repeated calls for comment, but in a prepared statement, Vitesse Chief Executive Chris Gardner said the acquisition creates a powerful combination. “I believe Microsemi will be able to leverage Vitesse’s Ethernet technology and capabilities further into the communications market and has the scale to implement the adoption of our industrial IoT (Internet of Things) strategy,” Gardner said in the statement. In the semiconductor business, size matters, with global giants Broadcom Corp. in Irvine and Marvell Technology Group Ltd. in Bermuda dominating the sector. Broadcom had revenue of $8.4 billion and Marvell had $3.7 billion last year. Meanwhile, Microsemi with about 3,000 employees recorded sales of $1.1 billion last year, and Vitesse, with 350 employess, only had about $108 million. Ben Kuo, founder and editor of tech news website SocalTech.com in Westlake Village, noted that Vitesse was one of the original semiconductor firms to locate along the 101 corridor but it was not a major player, so the combination with Microsemi made sense. “Tying them together can leverage some scale and they do not have to fight against the big guys without the same amount of capital,” Kuo said. Gary Mobley, an analyst following the technology industry for Benchmark Co. LLC, in New York, said consolidation is occurring in the tech industry because there are large amounts of cash from operations piling up. “There has been a trend by activist shareholders to pressure management not to sit on the cash,” Mobley said. “They can pay dividends, buy shares back or do an acquisition.” Differing finances While the deal made sense from a marketing and tech standpoint, it also worked financially, with Microsemi having a surplus of cash and Vitesse suffering deficits. For the most recent quarter, Vitesse reported a net loss of $5 million, while Microsemi had net income of $19.7 million. Microsemi’s revenue increased 19 percent to $304 million. For Vitesse investors, the acquisition represents an exit from a company that showed potential but experienced a tough road during the last decade, with a delisting from the Nasdaq and a scandal of backdating stock options by company executives. The company settled with the Securities and Exchange Commission in that fraud case by paying a $3 million civil penalty. Two executives pleaded guilty to obstruction of justice and were sentenced to probation. With the scandal in the past and a return to the Nasdaq in 2011, the company has been reinventing itself with technology for machine-to-machine communications, said Mobley of Benchmark. “They have focused on the right price point and performance point in going after that market,” he said. And while the Internet of Things is a good market, Kuo cautioned that it was really just the latest tech buzzword. “Everyone wants to get in on the current trend and that is the trend right now,” he explained. “Anyone who builds chips or high speed semiconductors, all that stuff gets used in that market.”

Mark Madler
Mark Madler
Mark R. Madler covers aviation & aerospace, manufacturing, technology, automotive & transportation, media & entertainment and the Antelope Valley. He joined the company in February 2006. Madler previously worked as a reporter for the Burbank Leader. Before that, he was a reporter for the City News Bureau of Chicago and several daily newspapers in the suburban Chicago area. He has a bachelor’s of science degree in journalism from the University of Illinois, Urbana-Champaign.

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