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Faster Bandwidth Chips: Broadcom Stock Offer May Zoom

It's always the last mile that's the hardest. With the Internet, that represents the bottleneck of the existing telephone networks that max out at 56.6 kbps on a good day, and the limited cable Internet wires that only reach small pockets of the U.S. and globe at a few megs per second. Don't hold your breath, but here comes warp speed.

Broadcom wants to be at the center of this fatter bandwidth "webtopia" that many believe may be just around the corner. It makes silicon chips for cable modems, set top boxes, and xDSL devices, anything that moves data at the ever voracious PCs at interactive TV speeds.

The Irvine, CA-based firm wants to sell its story and 3.5 million shares of class A common on Wall Street at a target share price of $11. Our number crunching shows BRCM may be after a $660 million market capitalization, about 18x 1997 revenue with losses. We estimate going forward this may be 9x 1998 revenue or about 60x estimated earnings.

On the plus side, fourth-quarter revenue reached $17.3 million and $2.47 net income, as high-speed demand starts to emerge.

A Screaming IPO On Its Way?

Broadcom  
Pro forma IPO valuation estimates BRCM
   
Offering 3.50
Greenshoe 0.53
Total offer with greenshoe 4.03
IPO offering price $ 11.00
IPO gross proceeds $ 38.50
   
Series A common 4.00
Series B common 39.21
Shares out pro forma 43.21
Plus options @ $2.12 wtd. Avg. 5.40
Plus incentive stock options 11.46
Fully-diluted shares (FDS) 60.07
IPO market cap $ 660.77
Plus long-term debt 0.19
Less working cap $ 51.96
Less warrant inflow $ 11.45
= IPO enterprise value $ 597.55
   
Revenue  
1997 $36.96
   
Loss  
1997 -$1.17
Primary share loss 1997 -$0.04
   
Revenue multiple  
IPO market cap/1997 revenue 18
IPO enterprise value/1997 revenue 16
   
all figures in millions except  
multiple and share prices  
© 1998 Mecklermedia  

Broadcom's five primary product lines encompass: high-speed communications and MPEG video/audio devices for the cable television set-top box market; high-speed data transmission and media access control devices for the cable modem market; 10/100Base-T Ethernet transceivers and repeater controllers for the high-speed networking market; receivers and MPEG video/audio devices for the DBS (satellite) and terrestrial wireless markets; and broadband twisted pair transceivers for the xDSL market. Translation: Faster Internet speeds via silicon of various flavors through many mediums.

Broadcom's customers include an array of set top and cable modem makers including General Instrument, and 3Com, and others including Cisco, Bay Networks, Motorola, and Scientific-Atlanta. 3Com alone accounted for more than half of Broadcom's revenue in 1997.

The high-speed chip maker should be a no-brainer, right? Maybe not. The problem is that many of these customers also compete with Broadcom or could very easily compete for the same market the company is after. The same customers also have deeper pockets and wider distribution channels.

Broadcom also doesn't own its own chip fabrication plant which is good and bad. Good because it saves from building billion dollar plants every few years like Intel does, bad because it has only two manufacturers--ASAT Ltd. in Hong Kong and ST Assembly Test Services in Singapore--which make its chips.

Broadcom employs 238 full-time employees and 19 contract employees, including 172 employees in research and development, 34 in sales and marketing, 26 in manufacturing operations, and 25 in general administration. Most of its management have engineering degrees and the two founders came from PairGain, the leader in DSL solutions (high-speed networking).

According to Broadcom's filing, related to Broadcom hiring former Rockwell employees, Rockwell asserts misappropriation of trade secrets, breach of duty of loyalty, tortious interference with prospective business advantage, unfair business practices, and unfair competition. Two other suits are also pending against Broadcom.

Pro forma insiders own 61%, with Intel, General Instrument, Scientific-Atlantic, and Cisco each owning between 3% and 6%. Cisco plans on buying 500,000 shares with this offering at IPO price. Underwriters are Morgan Stanley Dean Witter, BT Alex.Brown, Deutsche Morgan Grenfell, and Hambrecht & Quist.

The question remains: Will Broadcom scream on Wall Street? We think the market for high-speed solutions may be huge as content, commerce, services and demand grows on the Internet.

So far Broadcom looks like it may have at least a toe hold in several key markets across the many pipes out there from cable to telco. It's that last mile. If Broadcom can keep up with the marathon runners such as Cisco and 3Com by selling them silicon, that toe may be well placed. One slip and it may get stubbed though.