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Broadcom Introduces More Chip Flavors

With its $316 million stock swap agreement to acquire home networking chipmaker Epigram leading broadband chip maker Broadcom (NASDAQ:BRCM) could be positioning itself as an end-to-end broadband chip player.

Why I like this deal: it gives Broadcom a footprint in some advanced chip sets that allow data transfer as fast as 10MBPS over plain old phone wires. That's the kind of speed that makes cable and DSL hum.

The question is the time right for a home networking play on any level? Home computer networks are rare at the moment as most homes with a PC probably use just one.

However, as PC technology comes to drive more and more household functions, and as more PCs pop up in the home (parents, kids), the inflection point for investing in this theatre of opportunity may be fast approaching.

On a valuation basis I don't believe Epigram was producing much (if any) revenue.

Broadcom's revenue story looks very strong in my opinion and could get stronger. Critics of Internet stocks have one here generating exponential sales growth with real net income.

Broadcom generated $203 million revenue in 1998, up from $37 million in 1997. Net income reached $36 million. First quarter 1999 results again look positive with revenue of $96 million and earnings of $19 million.

It's premature to compare Broadcom with Intel as apple to apple. But I do think seeing the seeds of potential in Broadcom as a leading broadband chip firm (with telco and cable TV households anxious for speed) makes sense at current valuation levels.

With the growth in cable modem deployments, set-top boxes with Internet, and DSL I forecast BRCM could post more than $450 million in revenue for 1999.

If the net income margin remains that implies $85 million after tax income (before any charges).

For year 2000 and 2001 if Broadcom can leverage its leadership in broadband chips and home networking -- with perhaps a few more key buys in wireless for one -- I could see the path to BRCM shares taking on a new sustainable level in valuation.

The real value to Broadcom I think laid in the time to market and defensive takeout of the technology.

Consider that Lucent (NYSE:LU) had cut a deal with Epigram for its technology. Lucent, for those not accustomed to looking at the firm this way, was an early call I had more than a year ago that said this stock looked very much like an Internet stock in the making. Too many innovations come from Lucent to ignore.

But the one thing Lucent didn't pioneer was the emerging field of home networking. So Broadcom, already a rival in the broadband chip set arena, beat Lucent to the punch.

In doing so, it also beat Intel (NASDAQ:INTC) and the other silicon surfers. Intel, you may recall, agreed to acquire networking and telecom chip maker Level One Communications for $2.2 billion stock. That deal March 4 knocked the wind out of Broadcom shares as some observers had bet Intel would perhaps acquire Broadcom.

In January I thought an Intel-Broadcom deal made sense (it may still). But Intel has been on the hunt in other areas of late: it acquired a 2.9% position in wireless home networking outfit Proxim in a deal announced April 28.

As Intel moves around Broadcom in the silicon space I think it brings up more challenges for Broadcom to get more aggressive in the field to begin to assemble a suite of broadband solutions in the box and in the network.


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