Fool.com: Intel Says DSP the Key to 3G (News) October 14, 1999

Intel Says DSP the Key to 3G

By Brian Graney (TMF Panic)
October 14, 1999

Two days after reporting its Q3 earnings report, chipmaker Intel Corp. (Nasdaq: INTC) jumped back into the spotlight today by announcing that it will acquire wireless communications baseband chipsets supplier DSP Communications (NYSE: DSP).

Despite being the proud owner of a stock whose price has appreciated 21% so far this year, Intel is whipping out its wallet and paying $1.6 billion in cash for the company, or $36 per share. The sweet 28% premium to DSP's closing price of $28 per share last night may seem a little steep for a company with only $131 million in revenues and $31 million in operating profits last year. Then again, DSP's stock has been all over the place in the past few years, rising to as high as $31 7/8 this past June. Predictably, the company's shares jumped skyward this morning.

Unlike recent Intel acquisitions where the main aim has been to bulk up the firm's growing Network Products Division, DSP will instead be folded into Intel's Computing Enhancement Group, which used to be the old Semiconductor Products Group. This group focuses on the company's core logic PC chipsets, flash memories, and embedded microprocessors and is also the home to Intel's StrongARM line of processors. With DSP on board, Intel can take its design expertise in these areas and make a run at the exploding market for cellular communications technologies.

Traditionally, DSP's main business has revolved around providing Personal Digital Cellular (PDC) chipsets to Japanese digital cellphone makers and TDMA chipsets, which is the digital standard supported by a number of wireless carriers in the U.S. and South America. However, the company has been making great strides lately with its new CDMA chipsets, which began shipping last year.

In Q2, CDMA chipsets represented 19% of total sales, up from 1% in Q1, according to Warburg Dillon Read. Without a doubt, the growth prospects of the CDMA business and DSP's development program for emerging third generation (3G) wireless technologies are what attracted the chip giant to the company in the first place.

As with its acquisition of communications chipmaker Level One earlier this year, Intel is essentially spending a boatload of money for a heap of intellectual property and design expertise. Like Level One, DSP does not own any fabrication facilities, relying on independent foundries instead. That keeps the economic profile of the business as "light" as a feather, with net property and equipment representing a mere 4% sliver of total assets last year. So, judging the purchase price in terms of the tangible assets Intel will be receiving in return is an analytical waste of time.

In terms of the R&D know-how Intel is getting its hands on, the deal's value is pretty comparable to the price paid for Level One. At the end of last year, DSP had 230 employees, including 164 involved in R&D. Based on the $1.6 billion purchase price, Intel is paying about $9.7 million per engineer. On the other hand, Level One's 271 engineers fetched $8.1 million apiece based on the company's $2.2 billion price tag. Obviously, top-notch expertise in cutting-edge technologies doesn't come cheap, and Intel has proven this year that it is willing to pay up to get in on what it feels will be the dominant technologies in the not-too-distant future.

The financial details of the deal aside, perhaps the most intriguing aspect of today's news is what the combination of Intel and DSP will mean down the road for current market darling Qualcomm (Nasdaq: QCOM), which has established itself as the CDMA technology leader. Currently, DSP's products are really the only alternative to Qualcomm's CDMA chipsets. With the competition's breath now much stronger on its back, Qualcomm's shares slipped a tad this morning.

Qualcomm definitely has a large head start in the CDMA area, as DSP has only rounded up five CDMA customers so far. But as the global wireless industry transitions to 3G and embraces new technologies such as Wideband-CDMA, Intel's enormous financial resources could make the competition interesting. If they haven't already, technology investors should dial up this industry and pay close attention.

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