Macom buys Applied for cloud data communications
Macom believes it got Applied’s “gold nugget” of CMOS comms chips for a bargain at a 15.4% premium in a semiconductor merger frenzy that has seen premiums above 30%. In an indication of the pressure for Applied to cut its losses on its X-Gene ARM server SoC, the mixed cash and stock deal started at a 10% premium until Macom’s stock price rose.
Macom saw Applied’s leadership in the PAM-4 technology needed for 100 and 400 Gbit/second Ethernet as a key prize. The deal also adds to Macom’s telco customer list access to Applied’s network OEM and data center customers including Arista, Cisco, Juniper, Amazon, Facebook and Google.
The deal could add by 2019 $500 million a year to Macom’s addressable market. The company that previously focused on analog RF and optical parts mainly for telecom providers had created a new data center group just last week.
Cisco, which represents more than 25% of Applied’s sales, worked with the chip vendor on a proposal for a single-lambda version of PAM-4, recently accepted by the IEEE. The technology is poised for broad uptake in coming waves of 100 and 400G network upgrades for bandwidth-hungry data centers, said John Croteau, Macom’s chief executive in a call with analysts.
Macom also worked with Cisco and Applied on a demo of the PAM-4 approach shown at an event earlier this year. It should emerge as a product this year with revenues in 2017, he said.
Communications is the bottleneck for connecting racks of servers in today’s warehoused-sized data centers of companies like Amazon and Google. So they are expected to drive adoption of the relatively expensive PAM-4 modulation technology which Croteau said should bolster profit margins at Macom.
The deal also gives Macom, which makes most of its parts in compound semiconductor processes, Applied’s capabilities in deep submicron CMOS design. It’s an area where Croteau said he has “battle scars” from his prior Mindspeed acquisition in late 2013.
“We understand the recipe for success there now…we have opportunities in aerospace and defense and array antenna architectures where that competency can be disruptive,” Croteau said.
Macom will keep Applied’s mature legacy business in embedded processors that includes framer and mapper chips. By contrast, Applied’s X-Gene ARM server business “doesn’t fit in our portfolio even in presence of [its likely future] success,” Croteau said.
The microprocessor unit was making an estimated $55 million annual loss that represented 51% of Applied’s operating expenses while contributing just 1% of its revenues.
The unit was “well positioned with great lead customers…[as part of its due diligence] we got to see its customers and they are the ones that matter — the magnitude of that opportunity is staggering,” said Croteau.
Just when that opportunity is realized is unclear. Analysts expect the X-Gene 3 that taped out this fall has a reasonable shot of market traction along with similar FinFET-class SoCs coming next year from Qualcomm and Cavium.
However, to date ARM server SoCs have fallen short of the performance and even performance/Watt of Intel’s portfolio of server processors. Even Hewlett-Packard, an early supporter of ARM servers, wound up shipping mainly Intel processors in its so-called Moonshot, a processor-agnostic server.
That said, over the last few months several companies were in the bidding for Applied, including some looking just to acquire the SoC unit. Macom expects to sell the unit within 100 days after the deal closes. The undisclosed asking price is likely significantly less than the $50-55 million a year Macom expects to save by selling the unit and trimming other overheads at Applied.
The fate of Applied chief executive Paramesh Gopi has yet to be determined. Gopi was the vocal champion of X-Gene despite two generations that largely failed to find significant sockets.
“Paramesh is welcome in my camp any day, but it’s largely up to him…Paramesh exudes credibility in the data center side of the industry, but you’ll have to ask him where his heart lies, and it may depend on who buys the unit,” said Croteau.
— Rick Merritt, Silicon Valley Bureau Chief, EE Times
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