Broadcom Happy to Let Chips Fly
Broadcom Inc.’s extraordinary stock debut last month left founders Henry Samueli and Henry Nicholas among America’s wealthiest people.
The duo each netted $6.5 million and their combined 56% stake in the Irvine chip maker is worth nearly $1.25 billion.
The high-tech industry is rife with tales of fast cash made by engineers who launch companies, only to sell out to Wall Street. But the founders of the most talked about company in Orange County this year insist that they won’t fall victim to that grab-and-dash culture.
Not that there won’t be temptation. Many of Broadcom’s key staff could quit in comfort by year’s end, thanks to a generous company stock plan. Particularly at risk are the engineers who make chips that send high-speed Internet access over ordinary telephone and television lines.
But the two men aren’t worried, even though all of Broadcom’s 220 engineers took a pay cut to come work for the company. They note that only two full-time employees have left Broadcom since it was launched out of Nicholas’ spare bedroom in 1991.
“It’s too exciting to leave,” said Nicholas, 38, the company’s chief executive who spoke this week for the first time since Broadcom went public. “Money matters, but not as much as the technology we’re trying to build.”
Indeed, the market for the company’s products--TV set-top boxes, cable modems and digital satellite signal decoders--is only beginning to blossom, analysts said.
“Look at Microsoft. Bill Gates didn’t start to lose staff until the company became more established in its markets,” said Byron Roth, president of the investment firm Cruttenden Roth. “Even though their stock was so well received, their market opportunities are still in the early stages.”
The two men, however, are already enjoying some of the rewards of going public.
Samueli, 43, and his family bought a new home in San Juan Capistrano. Nicholas picked up new cars for his relatives: a Mercedes for his parents, a Cadillac for his mother-in-law.
The executives say they’re astonished by the onslaught of strangers vying for their attention. Resumes flowed from fax machines and telephones rang constantly for the first few days, as news spread about the company’s phenomenal public offering.
Even now, top executives still wade through a flood of e-mail, many from nonprofit organizations seeking donations and salesmen with juicy offers for “just about everything,” Nicholas said.
The only thing that hasn’t changed is the long days at work.
“We’re still working 80-hour weeks, just like we did before the public offering, because we have so much more to achieve,” Nicholas said. “My wife keeps reminding me that I don’t have to work for a living.”
The two men met while working together at TRW Inc. in the early 1980s. Their friendship later flourished at UCLA, where Samueli worked as an electrical engineering professor and was Nicholas’ advisor on a doctorate program.
Samueli has been on leave since 1995, but he remains “one of the department’s most popular” professors, said William Kaiser, chair of UCLA’s electrical engineering school. Former students would wait for hours to crash his courses.
While working on communication tools, the men realized their research surpassed the commercial sector. So the duo joined several other scientists and launched PairGain Technologies Inc., then based in Cerritos. Their goal: develop a technology that could cram more data across copper wires and revolutionize the way the corporate world used its telephone lines. Their solution: integrated services digital networks, or ISDN.
It was 1988, years before the word “Internet” would enter the mainstream consciousness. There sat PairGain, its advanced technology ready for a data-hungry audience.
But the demand didn’t materialize for one simple reason: cost. ISDN equipment was expensive and the service could be a hassle for consumers to set up.
“We were burning through millions of dollars,” Nicholas said. “The [venture capitalists] weren’t thrilled.”
While PairGain fretted over its money woes, the two men tried to find a cheaper approach. They turned to a high-bit digital subscriber line, or HDSL. Faster than traditional telephone modems, HDSL squeezes digital data over ordinary copper phone lines.
It wasn’t a particularly revolutionary idea, analysts say. But that didn’t matter, because it worked and the telecommunications industry flocked to it. Tapping funds from a corporate investor to cover development costs, PairGain jumped into the HDSL market and revived its flagging finances.
Samueli and Nicholas then decided to leave PairGain. The parting was amicable, say executives from both companies; they just disagreed over which technology to explore.
Nicholas and Samueli spotted an opportunity in broadband chips, which carry digital transmissions at high speeds over phone and television cable lines. Their future was to put their chips in any device that would bring data into a person’s home.
Unlike hundreds of hungry technology start-ups, Broadcom’s founders walked away from sweet venture capital offers.
“We wanted control,” Nicholas said. “It was an integrity thing. We each wrote out checks for $5,000, put them in the bank and started looking for customers.”
Forty percent of Broadcom’s business hinges on the cable industry, with the remainder invested in chips for other outlets such as wireless networks and broadcast satellite ventures.
Yet the company took a huge risk early on by making cable a high priority. The battle over which industry will funnel high-speed data into the home--the telephone companies? the cable world?--has raged since 1995. And while cable modems are becoming more prevalent, it remains unclear which camp will take the lead.
So far, analysts say the gamble has paid off for Broadcom because the company quickly lined up a steady stream of big-name clientele.
Today, Motorola Inc. picks up Broadcom’s semiconductor chips for its cable modems. Scientific-Atlanta uses the chips for digital television set-top boxes. And Intel Corp., Cisco Systems Inc., General Instruments Corp. and 3Com Corp. snap them up for various telecommunication products.
“The cable modem market is not hype anymore,” said Patti A. Reali, a cable industry analyst with the research firm Dataquest. “There’s a pent-up demand for high-speed access [to the Internet], both on the consumer side and in the business world. With all of the video and audio that’s now being sent over the Internet, people are tired of being frustrated by the slow speeds of telephone modems.”
Such a promising future--and an increasingly diversified product line--enticed investors into a buying frenzy when Broadcom went public last month. Within a single day, the 340-person company with $37 million in sales last year was suddenly worth more than $2.3 billion.
In Nasdaq trading Wednesday, it closed at $55.75, down $1.25, but up 5% from its first-day close.
Wall Street has been fascinated with technology stocks, particularly those tied to the Internet. Big online companies with little or no profit, such as Yahoo and Amazon.com, enjoyed huge jumps last month before their prices recently flattened out.
Some industry watchers wonder whether Broadcom, flush from the current investor love-in, will follow the misfortune of other red-hot IPOs such as sunglasses maker Oakley Inc. and fashion designer Mossimo Inc., whose stocks were later hammered when they disappointed investors.
“That which goes up must come down,” said Lloyd Greif, chief executive of Greif & Co., a Los Angeles investment broker. “When it comes to technology stocks, all it takes is a single piece of negative information to drive the price down. If a company misses its earnings by a penny a share, a lot of investors use that as an excuse to dump their shares.”
For now at least, things continue to look up. Broadcom announced in March that it signed an agreement to provide Chicago computer products maker General Instrument Corp. with high-speed chips for as many as 15 million set-top boxes, which will connect the new generation of digital television sets to the Net and other services.
“There is a large and pervasive thirst for broadband access in the home,” Nicholas said. “People who don’t understand technology, who don’t understand what we’re trying to do, shouldn’t be investing in Broadcom.”
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Broadcom Holds the Line
Broadcom Inc.’s stock has remained mostly in the $50 range since the company went public in mid-April. The stock was priced at $24, but surged to $70 a share during the first day of trading before settling back to the mid-$50s by the close of trading. Closing prices since the April 17 debut:
April 17: $53.63
May 13: $55.75
Source: Bloomberg News
