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PMC, Quantum to merge
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July 12, 2000: 2:04 p.m. ET
Semiconductor companies team in $2.3B stock swap targeting broadband
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NEW YORK (CNNfn) - Broadband semiconductor technology provider PMC-Sierra said Wednesday it will merge with chip maker Quantum Effect Devices in a stock swap valued at $2.3 billion.
Terms call for PMC-Sierra (PMCS: Research, Estimates) to issue 0.385 share for each Quantum (QEDI: Research, Estimates) share, based on PMC's Tuesday closing price of 196-7/16.
That values Quantum at $75.63 a share, a 25 percent premium over Tuesday's closing price of 60-1/2.
"The bottom line financially is that we believe QED can be a billion dollar a year business for us within five years, and we think that it will be neutral to our earnings this year," PMC Chairman and CEO Bob Bailey said.
 PMC is due to report earnings Thursday after the close of the market, with First Call expecting the company to turn in a profit of 19 cents a share.
"It's a goal, just like in '94. We set a goal for PMC to do a half a billion [dollars] in 2001," Bailey said. "I think we're going to achieve that is the good news, but it's not a forecast, it's a goal. We are doing business with over 200 startup companies today."
Quantum, which has a market capitalization of roughly $2.1 billion, went public in February, offering 3.7 million shares at $16 per share. In its filing, the company noted: "We have incurred net losses in each quarter since we began developing and marketing our own products. As of June 30, 1999, we had an accumulated deficit of $24.4 million, and we may not achieve or sustain profitability."
For the fiscal year ended June 1999, the company reported $15.3 million in gross revenue and a net loss of $11.7 million.
In trading Wednesday, PMC shares gained 10-5/16, or 5.2 percent, to 206-3/4, and Quantum shot up 17-5/8, or 29 percent, to 78-1/8.
Campbell, Calif.-based PMC makes broadband communication semiconductors used by Internet backbone equipment providers including Cisco Systems (CSCO: Research, Estimates), Lucent Technologies (LU: Research, Estimates), Nortel, Alcatel, Ericsson and NEC.
 San Jose, Calif.-based Quantum makes MIPS microprocessors for networking applications that are used in broadband infrastructures. MIPS, or million instructions per second, technology is used to power the speed of a computer or workstation. Quantum is known as an open architecture company as opposed to a network processor company. Cisco is also one of Quantum's clients, accounting for 10 percent of its revenue, according to the company.
"We have a very significant position at Cisco today, with the MIPS architecture," said Quantum President and CEO Tom Riordan. "And even more importantly, with QED's particular implementation of MIPS, and we also have significant design wins with Lucent, Extreme Networks and many others that are not presently announced."
Riordan said 70 percent of QED's business is with communications companies and the remaining 30 percent is with non-communications based clients.
"Part of our vision for joining forces with PMC is to give us the kind of might that Motorola (MOT: Research, Estimates) has, to push our MIPS architecture implementations and make them far more pervasive than we could have done on our own," Riordan said.
PMC chief Bailey said that the companies will first focus on having each other's chips work together and then look toward combining one another's technologies in new products.
"The first priority for us is to make our chips interface directly and cleanly with the RM500 and 7000," Bailey said. "It's not going to be that daunting of a task. That's work that will soon start."
"After that, there may be opportunities for integration, but we already see opportunities for comprehensive solutions with both the optical networking division products, as well as the Access division's products with in PMC," Bailey said.
Merrill Lynch analyst Joe Osha said he views Quantum's technology as complementary to the switching fabric and packet processor technology that PMC has already acquired with its purchases of Extreme Packet Networks and Abrizio. Osha also said that QED is another piece in the puzzle for PMC, which continues to progress towards becoming a one-stop networking semiconductor shop.
Charlie Galvin at Credit Suisse First Boston maintained his "strong buy" rating on PMC-Sierra and said he thinks the acquisition is a good addition in terms of engineering talent and several lines of MIPS-based embedded microprocessors for networking applications.
But Galvin also noted that: "The biggest obstacle we see for PMCS is how it handles QED's more consumer-oriented and non-infrastructure communications designs -- QED processors are sold into Hewlett-Packard printers, set-top boxes [WebTV] and Windows CE devices. We expect more guidance on this strategy when PMCS reports earnings Thursday." 
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