Three big start-up acquisitions that fell through

Four prominent Israeli chip developers were recently involved in acquisition talks but only Provigent was bought.

In growing markets, mature start-up companies are frequently faced with the option of being acquired. In some cases, large technology companies express interest, sometimes this develops into serious discussions, but the handing over of funds and swapping of shares is rare.

It could be the boom in the telecommunication industry, or just luck, but in the first quarter this year, four prominent Israeli start-ups in the chip development industry were involved in negotiations: Provigent, BroadLight, Altair Semiconductor, and Siano, totaling close to a billion dollars. The acquisition of Provigent by Broadcom for $340 million was the only deal that actually came to fruition. If things had worked out differently, we would have been witnesses to the disappearance of an entire generation of Israeli microprocessor companies in the first half of the year.

The most significant drama occurred surrounding Siano, a supplier of mobile digital TV receiver chips. Siano's receiver chips enable the reception of live TV broadcasts on mobile communication devices, instead of through dense cellular networks.

Sources inform "Globes" that last spring the American company Telegent held advanced negotiations with the intention of acquiring the Israeli competitor, Siano, for $100-150 million in cash or in combination with shares. By then, Siano had raised $78 million from the following funds: JVP, DFJ-Tamir Fishman, Star Ventures, and Walden Israel and Bessemer Venture Partners. In addition, Siano received a loan of $10 million from the Plenus Fund.

Except that things went awry. The sequence of events in Telegent, the potential buyer, forms a fantastic story of its own, and a sad lesson for technology companies that rely on the Chinese market.

In November 2009, Telegent, which developed analog TV receiver chips, filed a prospectus to the US Securities and Exchange Commission (SEC) for raising up to $250 million. With sales of $111 million during the six months preceding the filing of the prospectus, and impressive and stable profitability for more than two years, Telegent looked like the next hot thing.

In May 2010, just six months after filing the prospectus, Telegent surprised the market when it announced that it was withdrawing the prospectus and cancelling the IPO, as well as searching for a new CEO. The company explained the decision by saying that Telegent was in good enough of a situation, and had enough cash in its coffers ($150 million then) to continue with the plan without going public. In retrospect, this sounds ironic, especially considering that Telegent was acquired in July 2011 by the giant Chinese microprocessor company Spreadtrum for only $1 million.

The investors preferred to withdraw their money

The decline of the company occurred mainly as a result of rising competition in the Chinese market for analog TV microprocessors. To put matters into proportion, technology magazine EEtimes reported in 2009 that Telegent's chip set was selling for $6 a unit. The price crashed in less than a year by almost 90% and eliminated the profit margins (60-70%) which it had tried to use to reach Wall Street.

Telegent had wanted to acquire Siano in an effort to adopt a new strategy that included the use of a technology that supports a variety of digital TV receivers. Telegent tried to reach a good starting position, in case mobile computers began using this technology in large quantities. In addition, the company wanted to enlarge its market share in China, and to establish itself in South America, namely Brazil.

As a result of the business situation, Telegent shareholders, who had invested close to $35 million, lost faith in the company. The investors preferred withdrawing their money from the company, which had provided them with a respectable return for over seven years, and to forego additional strategic actions. In this fashion, the investors received their money, and sold the intellectual property, as well as some of the activity.

For Siano CEO Alon Ironi, this was not a glorious exit. After such a large amount of money was invested in the company, it was reasonable that the investors would have preferred other options. However, the mobile TV market has fluctuated between highs and lows over the last few years along with the vision and ability to pursue it. At the moment, the companies' market situation is not great.

Along with Telegent, the French company DiBcom, which supplies chips that enable digital mobile TV reception in vehicles, was sold at the end of July. DiBcom, in which Israeli Vertex Venture Capital invested, was sold for $35 million after $80 million was invested in it.

Siano's investors, headed by Erel Margalit's JVP fund, apparently believe that the company still has more opportunities. After negotiations with Telegent were dropped, Siano set out to raise $20 million. The company's vision is to penetrate markets in South America and the US, in the hope that the tablet breakthrough will bring about a rise in the need for mobile TV.

Also, Siano recently resolved its patent dispute, which had threatened its activity in the Chinese market, over which the company claims it controls 50%, and from which most of its sales derive.

Nasdaq's back door has shut

Market forces were also the reason why negotiations did not materialize for Altair and for Broadlight. In the second half of 2010, a few strategic moves were made in telecommunication chip supplier industry for fourth generation (4G) mobile communication. The technology, which was to start being used extensively in the middle of the decade, spread earlier than planned, and the technology giants began making purchases. In this way, Broadcom acquired Beceem for $330 million, and Intel acquired Infineon's wireless solutions Business (WLS) for $1.2 billion.

At the end of 2010, Altair held talks about a possible acquisition by American company Atheros, which supplies wireless networking technologies, following close cooperation between the two companies. According to estimates, the purchase price could have been between $150-250 million. Except that at the beginning of 2011, Atheros was bought by Qualcomm for $3.2 billion, and the strategic plans with Altair have been shelved for the time being.

As for BroadLight, at the end of 2010 the possibility of a merger or acquisition by American company Entropic, which supplies home entertainment technologies, was examined. The companies are extremely familiar with each other following their strategic cooperation.

BroadLight, whose total funding reached $62 million and whose total 2010 sales were $40 million, could have reached a market cap of $250-300 million, thereby enabling investors to enter Nasdaq through the back door.

The merger between the two companies is logical from a strategic point of view, since they complement each other. BroadLight supplies chips for GPON fast optic communication for home networking, whereas Entropic supplies in-home MoCA fast communication utilizing the coax infrastructure, which is common in the US. The merging of the two companies has been put on hold, at least for now, following the drop in value of Entropic's share price from close to a billion dollars at the end of 2010, to $350 at present.

Published by Globes [online], Israel business news - - on September 5, 2011

© Copyright of Globes Publisher Itonut (1983) Ltd. 2011

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