Picochip is to be bought by Mindspeed for around $50million. While the press release has been widely circulated, there has been relatively little deeper analysis of the deal and the issues surrounding it. Here are some further views, backed up by investor briefings and a call with a Picochip executive.
A quick look at Mindspeed
Mindspeed is a NASDAQ listed company (stockcode MSPD) based in California with a market capitalisation of $185M and a turnover of $160M. Not quite profitable, it more or less broke even last year (loss of 0.5%). It declared $45M in cash on the balance sheet.
Very much like Picochip, their business is the design and development of silicon chips for the telecom industry. Fabrication and manufacturing are outsourced. The company strives to stay ahead of the larger market players through innovation and careful targeting of growth markets.
Their dividend policy is quite clear: "We have never paid cash dividends on our capital stock. We currently intend to retain any earnings for use in our business and do not anticipate paying cash dividends in the foreseeable future."
They had 363 employees working on R&D across 13 design centres at end September 2011) LinkedIn lists a total of 465 employee members, with a surprisingly high 65% in R&D and across all employees 42% have 15+ years industry experience.
Customers include many of the major equipment vendors, specifically Alcatel-Lucent, Cisco, Huawei, Hitachi, Ericsson, Mitsubishi, Nokia Siemens Networks and ZTE.
Three product sectors contribute almost equal shares to the overall company revenues:
- Communications Convergence Processing (including femtocells)
- High Performance Analog
- WAN Communications
Their Trancede chip has been adopted by 22 companies for their LTE small cell product designs to date.
This company dominates the hardware designs for 3G femtocells, having pioneered the concept with other industry players from the outset. The deal revealed further details about their success previously kept private. They've shipped over a million chips to date and have around 70% of the global market. Their product covers all 3G except CDMA, and the company also has LTE (both FDD and TDD modes) in its portfolio.
Turnover for the last year was some $15million, with around 50-60% gross margin. There are some 150 employees, mostly in Bath, UK with others centres in Beijing, China and Cambridge UK.
When asked, Mindspeed revealed that current Picochip revenues mostly come from two network operators – ATT and Vodafone (across EMEA). While almost all their current revenues arise from 3G, the company has the only TDS-CDMA femtocell chipset in the market. If the Chinese market achieves the significant growth that Mindspeed foresee, this could contribute significantly to revenues during 2012.
Venture capital companies had invested some $110M in the business over the last 10 years. With analysts forecasting high growth, and the company has been well positioned after so many design wins. Unfortunately, the predicted market growth failed to materialize. My guess is that this left the business without enough working capital to continue evolve and grow. With investors not wanting to stump up more cash, the company was looking for a buyer.
The deal details
For a business with $110M invested in it, $50M sale price may not look too appealing. However, there is more to it than meets the eye. The $50M is half cash and half shares, which if held might be seen as a good investment – Mindspeed are very bullish about their own forecast growth for 2012. Their shares have gone up 10% in the last week alone. A further $25M is payable if the Picochip side of the business achieves 2012 revenues of $25M. Given that they are at $15M today, and Mindspeed forecast a growth of 50-60% (i.e. 23-24M), then that isn't too much of a stretch target. Presumably there will be some bonuses in there to encourage the Picochip management team not just to stick around, but strive hard to achieve that goal. Don't expect Picochip to fade quietly off stage to the left!
When asked, Mindspeed refused to comment if there were any other bidders for the company, citing commercial confidentiality.
A good acquisition
The business philosophy of Mindspeed and Picochip is very similar – fabless design of high technology chips for the communications market with continuous innovation. A high proportion of expenses are R&D related and income is re-invested. Both have many highly experienced staff with low turnover.
The technology involves multi-core DSPs and ARM processors with Layer 1 and 2 software supporting it.
Both companies have very complementary portfolios for femtocells. Picochip dominate 3G and have a demonstration for LTE but few known sales. Mindspeed have many LTE femtocell customers but little or no presence in 3G. Between them, they will have a comprehensive 3G/LTE portfolio.
I asked Doug Pulley, Picohip CTO, whether he expected one or other chipset to win out. He said that both companies have a shared vision which will bring the two strands together. Picochip has been on record before saying that a combined 3G/LTE femtocell would be based on 2 chipsets initially, with later designs becoming single chip. This is completely aligned with Mindspeed's long term view – if anything, the new combined company may be able to accelerate realization of this vision.
Doug, who has worked for Picochip for more than 10 years since he co-founded it, also said he was very "pleased with the deal" from a personal point of view. He is extremely proud of what Picochip has achieved over that period. I wouldn't be surprised if there were a few champagne corks to clear up in their offices at the end of last week, after celebrating the negotiations had finished.
The deal also provides longer term security for employees, with the business being sold as a going concern rather than simply for its current Intellectual Property. While there will undoubtedly be some downsizing of duplicated admin posts, the R&D teams are likely to stay intact. Any rationalization is due to be completed by the end of March. At this early stage of the proceedings, there are still many aspects to be worked through and I wasn't able to tease out any further insights directly affecting the staff.
They are still in the process of working out the combined roadmaps for both sets of products, but have stated there will be continuing investment into Picochip's 3G femtocell solutions. The combined company claims to have the largest SoC (System on a Chip) R&D team in the industry.
It's really too early to say how those providing other components for these solutions will be affected. Since both product sets will continue for some time, hardware components (e.g. timing, RF front end etc.) would presumably also remain unchanged. Software vendors will be keen to demonstrate continuing support, and look for ways to simplify their integration work across multiple platforms.
The view ahead
Mindspeed forecast strong growth of this market sector for several years ahead, quoting figures from ABI research of some 24 million units by 2014 and some 100% CAGR. With exploding demand for wireless data, they believe that the "heavy lifting" to satisfy it will have to be done by this class of product.
We can expect Picochip to continue to dominate the 3G femtocell market for some time. Those with existing designs based on their products can stand easy. If anything, I can expect their sales and marketing efforts to be doubled over the next year, appealing to both equipment vendors and network operators to grow the market.
Over time, we might see the Picochip brand subsumed by Mindspeed and the separate ranges of chipsets merge into a streamlined product set. But I doubt this will happen overnight.
Whether revenues come from large numbers of smaller residential femtocells or fewer (but more pricey) enterprise/metrocells, and whether these are 3G or LTE (or both), Mindspeed appear to have made a good strategic acquisition which creates a comprehensive product portfolio.