Undressing demand for wearable technologies

Contact: Ben Kolada

Still in the fad phase, wearable technology is gaining market interest, driven by new devices being introduced both by tech companies and old-school consumer goods firms. The advent of these new Internet-connected form factors, such as ‘smartwatches,’ fitness and health devices, will spur the creation of new application markets in the technology industry.

Demand for wearable technology is specifically being seen in interest for an Apple iWatch, a smartwatch that many expect will be released later this year. According to a recent report by ChangeWave Research, a service of 451 Research, prerelease demand for the iWatch already matches what the iPad and Intel Mac saw before their respective debuts.

The likely launch of the iWatch and overall emergence of new wearable technology devices, such as Google’s Glass, Nike’s FuelBand, Jawbone’s UP and various devices from Fitbit, will create new markets in application software. For example, there’s already an investment syndicate, called Glass Collective, made up of VC firms Google Ventures, Andreessen Horowitz and Kleiner Perkins Caufield & Byers, that are ready to fund companies building new ways to use Google’s Glass device.

Our senior mobile analyst, Chris Hazelton, believes these devices will create extremely tight bonds between users, the cloud and very likely new technology players. For example, unlike smartphone and tablet apps that are used infrequently or once and discarded, Google Glass apps will be persistent, following and advising a user throughout their day.

If you already own a wearable tech device, or are planning to buy one, let us know what you think of this sector and which applications you think will become most valuable. You can tweet us@451TechMnA or contact us anonymously.

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Intel: the latest tech giant to buy patents

Contact: Thejeswi Venkatesh

Intel has announced the acquisition of 190 patents, 170 patent applications and video codec software from RealNetworks for $120m. The transaction comes just eight months after Intel bought SiPort, a Santa Clara, California-based company that made audio-processing semiconductors. We see these moves as an indication that Intel wants to integrate more media and graphics capabilities into its chips, which these purchases should help with.

Barely three days ago, Intel inked a deal with QLogic to buy its InfiniBand business for $125m. That already makes Intel’s M&A spending for 2012 more than 60% of its full-year 2011 spending. What’s more, Intel was reportedly one of the bidders for InterDigital Communications, whose patent sale was called off earlier this week due to a gap in valuation expectations (InterDigital was reportedly looking for $3bn).

Patent sales have become one of the overarching themes of recent M&A activity, and one that we expect to continue throughout the year (see our 2012 M&A Outlook – Introduction for a full report). The reason for this is partly for offense (to expand a vendor’s existing product portfolio, like this Intel transaction) and partly for defense (as a hedge against a lawsuit, as is the case in Google’s reach for Motorola Mobility). The importance of these deals also registers on the other side of the transaction, the seller of the IP. Consider the contrast: Wall Street sent shares of RealNetworks soaring (up about 34%) on word that it had struck its deal with Intel, while it punished shares of InterDigital for not getting a sale done. InterDigital is currently trading at just half the level it was last summer.

Intel’s M&A activity

Fiscal year Deal volume Deal value
2011 11 $377m
2010 7 $9120m
2009 3 $884m
2008 3 $8m
2007 1 $110m

Source: The 451 M&A KnowledgeBase

Braving the IPO market

Contact: Thejeswi Venkatesh

While the IPO pipeline is getting drier, GCT Semiconductor has taken the contrarian route, filing paperwork for its proposed $100m offering. The company, a fabless designer and supplier of 4G mobile system-on-a-chip semiconductor solutions, has seen revenue triple from 2009 to $68.64m. With the mobile industry transitioning to 4G to handle the increase in rich media content, GCT thinks it could be on the verge of seeing sustained growth.

Clearly, that growth is what GCT will be selling on Wall Street. The planned offering resembles the Sequans Communications IPO, with the business profiles and financials of the two companies lining up similarly. For instance, both firms had nearly identical revenue at the time of filing and neither had an operating profit. Sequans came to market in April at 5 times trailing sales, a valuation we suspect GCT would be delighted with, since Sequans is currently trading at 2-3x trailing sales.

Across the tech sector, vendors planning to go public have instead ended up inside companies that are already public. In June, ANSYS pulled Apache Design Solutions from its IPO track and acquired it for $335m. Similarly, SiGe Semiconductor accepted a bid from Skyworks Solutions in May. With Qualcomm, Intel and Broadcom investing heavily in 4G solutions, we wouldn’t be surprised if one of these well-funded players snared GCT.

The ball is rolling in semiconductor networking M&A

Contact: Ben Kolada, Thejeswi Venkatesh

In announcing its largest-ever deal, and paying a princely price at the same time, Broadcom is keeping the ball rolling in semiconductor networking M&A. The company’s nearly $4bn pickup of NetLogic Microsystems comes less than two months after rival Intel announced a smaller strategic play of its own, and it likely won’t be the last transaction before the buyout curtain closes.

After a dearth of big-ticket semiconductor networking acquisitions, such vendors are now becoming hot properties. Before announcing its landmark NetLogic purchase, Broadcom itself bought networking provider Teknovus in February 2010 for $123m (in an earnings call, Broadcom mentioned that Teknovus generated revenue in the single digits of millions, which implies a price-to-sales valuation far north of 10x). And in July, Intel announced that it was acquiring Fulcrum Microsystems for a price we hear was in the ballpark of $175m, or about 13x trailing sales.

Broadcom’s richly priced offer for NetLogic, which values the target at 9.2x trailing sales, likely won’t be the last deal in this sector. If you ask The Street, the next companies to get scooped up could be Cavium Networks or EZchip Technologies. Shares of both firms surged following Broadcom’s announcement. As for likely acquirers, we could point to deep-pocketed vendors Qualcomm and Marvell Technology. With $10.7bn and $2.4bn of cash in their coffers, respectively, either company could easily digest Cavium, which currently sports a market cap of roughly $1.7bn.

Intel buys Fulcrum to further datacenter product push

Contact: Thejeswi Venkatesh, Ben Kolada

In a move that further boosts its 10-Gigabit Ethernet push, Intel has announced that it will acquire Fulcrum Microsystems, a fabless semiconductor company that developed the fully integrated FocalPoint family of 10Gb and 40Gb Ethernet switch chips. The acquisition advances Intel’s desire to transform itself into a comprehensive datacenter provider that offers computing, storage and networking building blocks.

Terms of the deal were not disclosed, though we estimate that Fulcrum generated about $13m in revenue in the 12 months before its sale. For a comparable transaction, we could look to Broadcom’s November 2009 acquisition of Dune Networks for about 3 times trailing sales, or twice the median for all semiconductor design deals announced so far this year. However, given Fulcrum’s strategic importance to Intel, we wouldn’t be surprised if its valuation is not only higher than the median, but also surpasses Dune’s. We would also note that Intel already had an insider’s view into Fulcrum – its venture investment arm, Intel Capital, provided mezzanine financing to Fulcrum in 2010.

Connecting thousands of nodes at maximum bandwidth is the holy grail of datacenter networking. Fulcrum’s FocalPoint portfolio provides high-performance, low-latency network switches to support evolving cloud architectures and the growth of converged networks in the enterprise. Intel’s earlier foray on this front was with InfiniBand, which it supported for many years before finally being squeezed out by faster, ultra-low-latency architectures like AMD’s HyperTransport consortium on the one end and on the other end by cheaper but slightly slower 10GigE. Intel has been supportive of 10Gb architecture and this acquisition further enhances that strategy. More importantly, 10GigE makes more sense for Intel if it is looking for a common single interconnect architecture for datacenters, since all applications run on it anyway.

Western Digital goes big in storage

Contact: Henry Baltazar, Brenon Daly

After flirting with a potential IPO, Hitachi Global Storage Technologies (GST) is set to be snapped up by its hard drive manufacturing rival Western Digital (WD) for $4.25bn in cash and stock. The deal would be the largest transaction in the storage industry in more than seven years, and would solidify WD’s position as the biggest hard drive vendor.

Beyond the benefits of consolidated manufacturing and increased market share, the Hitachi GST acquisition provides WD with credibility in the enterprise market, which was the key handicap it had to overcome against its longtime rival Seagate. Wall Street certainly saw it that way, sending WD shares up 14% in heavy Monday-morning trading. (WD indicated that the combination, which is expected to close in the third quarter, would be immediately accretive to non-GAAP earnings.)

We would also note that Hitachi GST’s expertise in enterprise SAS and fiber-channel hard drives was the key asset that led to its partnership with Intel for enterprise-class solid-state disks, and WD will now benefit from having these high-performance NAND flash products in its lineup. In the Hitachi GST/Intel partnership, though Intel manufactures the drives and supplies the NAND flash for the units, the products have Hitachi GST branding and are sold through Hitachi GST’s business partners.

The logic behind that strategy stemmed from the fact that Hitachi GST already had relationships with major enterprise storage and server providers, which would have made it easier for the products to get through qualification cycles at OEM partner sites. With this deal, WD will also attempt to leverage these relationships to build up its market share well beyond the consumer space.

Semi trouble

-Contact Thomas Rasmussen, Greg Quick

There are bargains aplenty in the semiconductor sector. From Integrated Device Technology’s $20m tuck-in of Silicon Optix last month to Sun Microsystems’ takeover last April of Montalvo Systems for an estimated $25m, we’ve seen a flurry of lowball purchases of semiconductor startups over the past year. The reason? These companies tend to have a high burn rate, without much revenue to offset that. (For instance, we estimate that Silicon Optix generated just $4m in sales in the year leading up to its acquisition, while Montalvo was still a pre-revenue company.)

Of course, the semiconductor industry has been slumping for several years, with a sharp decline in valuations. While the number of deals has been tracking steadily at around 180 per year recently (147 so far this year), the amount spent on deals – a far more important figure – is down almost 40% from last year, and close to 80% from 2006. Things are not getting any better, either, at least according to our recent Tech Banking Outlook Survey. Bankers rated the semiconductor industry the lowest in terms of anticipated M&A spending for next year.

This dour outlook is likely to have an extremely negative impact on the semiconductor startups still out there trying to make it. And there are a lot of companies, backed by a lot of venture capital, trying to crack into markets that have taken much longer to materialize than ever imagined. For example, in the promising category of 10Gbase-T physical layer technology, we wonder about the outlook for Teranetics and Solarflare Communications. Also, we recently wrote about the troubles in the highly crowded and fragmented 10-Gigabit Ethernet controller space. Although Intel, Broadcom and the overall market are starting to show signs of life, the situation for the many startups in the sector is not looking any better. In fact, we heard recently that Neterion’s president might have thrown in the towel and that the company could be on the block. Having wagered in the vicinity of $100m, investors will undoubtedly take a bath on this one.

Net effect from Intel’s buy

-by Thomas Rasmussen

It’s a somber 10-year anniversary for 10-Gigabit Ethernet vendor NetEffect. The company was picked up by Intel in a bankruptcy asset sale last week for a bargain $8m. Its technology, along with 30 of its engineers, will be rolled into Intel’s LAN Access Division. NetEffect has burned through some $50m in funding since recapitalizing in 2004. The company, which we once heralded as an innovator and potential leader in 10GigE technology, simply ran out of cash.

One reason for NetEffect’s scrap sale might be the increased competition. Big players like Intel, with its own organic offerings and its tuck-in of NetEffect, and Broadcom, with its $77m acquisition of Siliquent Technologies in 2005, have been crowding an already teeming market. This, coupled with scarce funding and lack of widespread adoption of the technology, makes us wonder what will happen to NetEffect’s surviving former rival startups still trying to stay afloat.

Venture capitalists have thrown hundreds of millions of dollars at 10GigE companies, with little to no payoff. We suspect the wind-down of NetEffect is an indication that VCs have had enough. Tehuti Networks, iVivity, Myricom, Neterion Technologies and Alacritech are some of the many startups in this sector that could potentially feel the net effect from this. In fact, iVivity seems to have quietly hit the switch already; its website is down and its phones are off the hook. Firms that will benefit from this include IBM, Hewlett-Packard, Dell and Hitachi, which are likely to follow Intel’s lead and peruse the bargain bin.

Known funding of select 10GigE players

Company Total funding Last round Status
Chelsio Communications $100m $25m series E (2008) Active
iVivity $60m $10m series D (2006) Missing in action
NetEffect $47m $25m series B (2006) Acquired by Intel for $8m
Siliquent Technologies $40m $21m (2004) Acquired by Broadcom in 2005 for $77m
Silverback Systems $51m $16m series D (2006) Acquired by Brocade Communications in 2007 for less than $10m*
Tehuti Networks Unknown Series B (2008) Active

Source: The 451 M&A KnowledgeBase *Official 451 Group estimate

Chipping away

It’s one down and (at least) one to go for AMD. The battered chip maker moved earlier this week to dump its digital TV (DTV) chip business to longtime partner Broadcom. AMD will pocket $193m in cash from the divestiture. Although the unit had been on the block for some time, AMD got a decent price for the cast-off. We understand the DTV unit was generating in the neighborhood of $150m in sales, meaning AMD got more than the typical ‘1x and done’ divestiture multiple. Further, we would note that the valuation of the DTV business at 1.3x sales is about twice AMD’s own price-to-sales valuation.

With one of the legacy ATI Technologies businesses off the books, AMD can move on to unwinding yet another part of that disastrous acquisition. (Since AMD spent $5.4bn in cash and stock on graphics chip company ATI two years ago, shares of the second-largest chipmaker for computers have plummeted 70%.) The next unit on the auction block: Processors for multimedia applications that run on mobile phones. Rival Intel made a similar move two years ago, selling its communications processor unit to Marvell Technology for $600m, which valued the unit at an estimated 1.5x sales. We suspect AMD would be perfectly happy with that kind of valuation in any divestiture of its mobile business. As to who might be on the other side of the deal, two companies come immediately to mind: Qualcomm is always on the lookout for more IP, and communications chipmaker Atheros has done three acquisitions in the past two years and is said to be looking for more.