Broadcom snaps up VisionTech

Just when it appeared that the wellsprings of acquisitions of Israeli companies were running dry, with the bitter taste of Lucent’s shrinking Chromatis acquisition still lingering, comes the announcement of the acquisition of VisionTech by US chip giant Broadcom for the princely sum of $800 million.

Broadcom is buying all VisionTech’s assets and liabilities in return for 8 million Broadcom shares, currently worth approximately $800 million on the stock exchange, after the Broadcom share dropped 16.7% to $97.5 last night. VisionTech’s employees and assets will be transferred to a new company called Broadcom Israel, which will be managed by VisionTech general manager Amir Morad. The principal beneficiaries from the deal are expected to be VisionTech shareholders: the founders, strategic investors (including Sega and the Japanese concern CSK), private Israeli, Japanese, and US investors, Israeli fund Vertex, and VisionTech employees holding options.

It is thought that the negotiations for the VisionTech acquisition began when the company was about to complete a private placement at a company value of over $250 million. According to company management, the money from the placement was designated for continuing the company’s aggressive growth and for mergers and acquisitions with other young companies. It now appears that the company shareholders chose to position the company in a more attractive bargaining position – being acquired, i.e. realizing their investment through the sale of the company. In April, VisionTech raised $17 million from a group of investors that included Sega, CSK, and Vertex, at a company value of $105 million, before money.

VisionTech was founded at the end of 1996 by Technion graduates Amir Morad and Leonid Yavitz. The company develops and manufactures chips for audio-video and data compression and deployment, using the MPEG-2 and MPEG-4 standards for the next generation of home electrical appliances and Internet and broadband communications products. VisionTech’s chip applications include personal TV and video recorders, digital cable converters, Internet video, digital TV broadcasts, satellite TV, digital video cameras, and DVD recorders.

Among other things, the company develops the Kfir chip for compressing and decoding video, audio, and data using MPEG-2 for applications such as cable and satellite converters, personal video recorders (PVR), and video over IP. The chip facilitates simultaneous transmission of two video streams, integration of previous video recordings, production of still photographs from video broadcasts for Internet applications, and transmission of snap shots. The communications network on which the digital information is transmitted (after the coding stage) is based on Cisco’s Catalyst and LightStream products. The Kfir chip currently operates in the systems of companies like Philips, Samsung, Daewoo, ReplayTV, Cornet, and Scientific Atlantic.

Growing market

VisionTech’s technology is based on a market just now getting under way. According to expert assessments, products such as digital converters will gradually enter every home in the Western world between 2001 and 2005, revolutionizing TV viewing habits for the first time in the medium’s history. The change is not merely technological, but conceptual, allowing each viewer to establish a personal broadcasting schedule and record up to 30 hours of broadcasts on a hard disk in the converter, without using a video recorder.

According to a Cahners in-Stat report, the market for PVR devices with digital converters is expected to grow significantly over the coming five years. Sales of eight million digital converters are expected in the US in 2001-2003, with potential sales of 80 million digital converters.

In the months before it was acquired, VisionTech announced it was cooperating with a number of large communications companies. In September, the company announced that Microsoft would include VisionTech’s chip in its Web-TV digital converter, Microsoft’s interactive Internet television venture. The deal is estimated at tens of millions of dollars for the coming years.

Cooperation with major companies

At the end of August, VisionTech announced it would supply tens of million of dollars of chips to Scientific Atlantic, the world’s second largest cable converter manufacturer, over the next three years. The chip is expected to make possible personal video recordings using the converters from mid-2001. VisionTech has also signed an agreement with LG Electronics of Korea for development and manufacturing of the next generation of its digital television, based on VisionTech’s video recording chips. The Kfir chip will be included in the next generation of digital television, marketing of which will commence in about a year. The new digital TV will feature personal digital recording for every home user, without a video recorder or cassette. VisionTech will also cooperate with LG Electronics in developing the next generation of television converters with video recording capability for hard disk. LG will include the Kfir video recording chip in its future cable converters.

It appears that the principal beneficiary from VisionTech’s technology will be Broadcom, which will be able to integrate VisionTech’s chip in its own chips.

Amir Morad says that VisionTech, which will be merged in Broadcom, will become a regional business and development center for Broadcom International, developing broadband communications products and locating additional investment, acquisitions and merger opportunities among Israeli start-ups. “Broadcom-Israel will need all of VisionTech’s employees and more,” said Morad.

Most comprehensive solution

Morad notes that the merger of Broadcom’s and VisionTech’s technology is creating the most advanced, comprehensive solution of its type for the broadband-era digital electronics market in the global chip industry, giving Broadcom control of the global digital converter market.

”VisionTech brings to the merger world-class technology and close business connections with international superstars, such as Microsoft Web-TV, Motorola GI, Panasonic, LG Electronics, Daewoo, Scientific Atlantic, and others. Broadcom brings its extensive global deployment and aggressive ambition to be in every device of every company in the world,” Morad said.

”Globes”: Congratulations. Under the circumstances, $800 million is not bad.

VisionTech cofounder Leonid Yavitz: ”The deal may have been signed just now, but the term sheet was signed at the end of September, when Broadcom’s share was at $256, reflecting a value of $2 billion for the deal. Being part of the communications sector, however, Broadcom suffered from the negative momentum on the stock exchange, just like Sierra and Marvell, and its share was hit hard. In contrast to the other companies, though, Broadcom made no wrong moves. The company issued a very positive quarterly report and has a very positive forecast for the future. Broadcom’s basic situation has not changed. At the moment, the market value is at low ebb, but that can change.”

Aren’t you afraid of what is coming? Look what happened to the Lucent-Chromatis deal, which shrunk severely.

”In contrast with Broadcom, Lucent made many mistakes. Don’t forget that its bad quarterly results were published shortly after signing the agreement with Chromatis. Lucent was punished because it was guilty – it didn’t meet forecasts, while Broadcom was guilty of nothing. Broadcom lost not a single dollar of its revenues forecast before the results were published. The company has exceeded analysts’ expectations for the past two and a half years, and in my opinion, this trend will continue. Keep in mind that only 15% of Broadcom’s revenues come from companies like Cisco, while most of its revenues come from supplying chips to companies manufacturing cable converters.”

Do all the company employees hold options?

”All company employees have options. I would say that three quarters of the company employees are going to become millionaires. We have only 37 employees, so the employees are very satisfied with this deal.”

Does $800 million seem reasonable to you, or could you have obtained more?

”Only at the current low point does the value appear reasonable. I expect that by the time the deal is closed, the value will rise to over $1 billion. If the amount is not doubled, it will certainly increase by at least 50%.”

What is so revolutionary about the chip? Do you have any competitors?

”The chip is absolutely unique. We actually have no direct competitors. Our only competitor is C-Cube Microsystems (Nasdaq: CUBE), a company that posted $200 million in revenues this year, with a market value similar to that at which we were sold. Their technology lags behind ours, though. Technology like ours was not in fact in the market until now, while the PVR market was previously practically nonexistent.”

What is your contribution to Broadcom?

”Broadcom, the first company to come out with a cable modem featuring a sophisticated converter, holds a very large market share. They almost control the market, while we supply the missing jigsaw piece they lack. Our chip gained Broadcom’s attention through our agreements with companies supplying converters. Since Broadcom’s chip was already installed in the cable converters of the world’s largest suppliers, with whom we worked, it chose to acquire us.”

Published by Israel's Business Arena on November 29, 2000