| Dado & George Buy Ikanos + Conexant DSL |
| Written by Dave Burstein |
 George Pavlov and Dado Banatao have bought control of Ikanos for the remarkably low price  of $42M even though Ikanos had $60M in cash and virtually no debt before the deal. $54M will be used to purchase Conexant's DSL business. The resulting company is a leader with over $200M in sales.
Five years ago, Ikanos and Metalink electrified the industry by showing VDSL running at 100 megabits at a Fast Net event I chaired. Expectations were huge. Chipmakers jumped in with promises of huge volumes, as well as a 25 megabit, 5,000 foot reach for a related product. I became a true believer after three bells and many others told me they expected to switch from ADSL to VDSL, "as soon as the interop and other similar problems were solved." The Ikanos IPO raised enough cash they still have money in the bank after years of losses. The next year, Ikanos and Metalink were back at Fast Net with chips doing 100 megabits in both directions, and deployments were beginning in Asia. Several million Japanese homes are now connected with 100 megabit VDSL from fiber to the basement, and Verizon is now doing similar in New York apartment buildings like mine. Little else went right. VDSL sales remained modest and lately have been dropping. Interop doesn't work well even today. AT&T will need to spend $billions more because they designed U-Verse believing the 25 meg/5,000 feet claim but more than 3,000 feet is not proving reliable. Although VDSL2 low end could be replacing ADSL2+ by now, problems of heat, performance, interop and cost have limited sales. It's hard to imagine more welcome investors. Dado has done extraordinarily successful startups, Chips and Technologies and S3, after designing one of the first calculator chips at Commodore in 1976. He now is an elder statesman/philantropist, active in the Philippine and university communities. Pavlov, his partner at Tallwood, learned directly from Steve Jobs what it took to be insanely great. Both have taken active roles at companies recently when they choose, but will probably treat this one more as an investment opportunity. "You will not find another VC that is more loyal and more supportive," is the comment at thefunded.com. Dado is a character, saying of Bill Gates "His human side, I heard--because I don't interact with him--that he's not fun to be around with. Maybe he just doesn't know how to enjoy himself." Banatao flies his own plane, something he learned right after college. He told the Inquirer, "I splurge on airplanes; I have one now and I have ordered a business jet and I'm about to buy a turbine. I splurge on very high-performance cars--a Porsche. I splurge on resort properties, like in Lake Tahoe and Sonoma." (Unsourced, via Geocities) Once Tallwood decided to invest, the deal could have have been handled through either company. Both have been on the market looking for the best available offer, with the uncertainty scaring customers and holding back long-range plans. 400 Conexant DSL employees are expected to remain, including many of the core Globespan team still in Red Bank, New Jersey. (Think Bell Labs inspiration in the home town of Count Basie.) Conexant is carrying half a billion in debt after losing $1.5B over the last five years. Tallgrass presumably didn't want that balance sheet and preferred to make Ikanos the surviving DSL company despite lower sales. After the deal, Tallgrass has 45% control of a company with over $200M in likely annual sales and substantial cash. They have warrants to take majority control at their convenience. Tallgrass has $500M to invest, and has moved from angel/emerging investments into mature deals like this one. Craig Garen of Conexant spoke of what "we" will do in the future, implying he will continue in a leading role. Mike Gulett moved from the Ikanos board to the CEO position last summer when Michael Ricci was replaced and this deal is a reunion of sorts. He was COO of Virata which was purchased by Globespan before both were absorbed into Conexant. Dado founded Chips and Technology, which provided the first "chipset" for PCs. Dado amazed everyone in the 1980's by replacing a slew of IBM PC motherboard chips with a few highly integrated chips that dramatically reduced the price of producing PC's. He went on to create graphics chipmaker S3, and as a venture capitalist now is on nine boards. The Filipino via Stanford Dado funded the Indonesian via Berkeley founders of Marvell to enough success they came together to donate a building to Berkeley. Alex Tan, a 2004 recipient of the Banatao Filipino American College Scholarship, thanks Dado. "When I thought I wouldn't be able to go to Stanford, a complete stranger offered to give me money to help defray the costs. Mike Gulett believes the larger company and lessened competition will be able to "get profitable." They have at least one product surprise under wraps. Wish them luck. ------- Gwen Carlson of Conexant has been the best pr person to work with for a long time; I don't know which of the companies she'll join. The cold equations meant Conexant had little choice but to make a deal, given the $50-100M cost of each new generation of chips. Here's some excerpt from their financial reporting. "If the economy or markets in which we operate continue to be subject to adverse economic conditions, our business, financial condition, cash flow and results of operations will be adversely affected. If the credit markets remain difficult to access or worsen or our performance is unfavorable due to economic conditions or for any other reasons, we may not be able to obtain sufficient capital to repay amounts due under (i) our credit facility expiring November 2009 (ii) our $141.4 million floating rate senior secured notes when they become due in November 2010 or earlier as a result of a mandatory offer to repurchase, and (iii) our $250.0 million convertible subordinated notes when they become due in March 2026 or earlier as a result of the mandatory repurchase requirements. The first mandatory repurchase date for our convertible subordinated notes is March 1, 2011. In the event we are unable to satisfy or refinance our debt obligations as the obligations are required to be paid, we will be required to consider strategic and other alternatives, including, among other things, the negotiation of revised terms of our indebtedness, the exchange of new securities for existing indebtedness obligations and the sale of assets to generate funds. There is no assurance that we would be successful We have derived a substantial portion of our past revenue from sales to a relatively small number of customers. As a result, the loss of any significant customer could materially and adversely affect our financial condition and results of operations. R&D expense decreased $48.4 million, or 28%, in fiscal 2008 compared to fiscal 2007. The decrease is due to a 43% reduction in R&D headcount from September 2007 to September 2008.
|
