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It was the height of the bubble and the peak of entrepreneur Davidi Gilo’s career. In mid-October 1999, everyone in Israel’s capital market and many foreign guests convened at the Tel Aviv Hilton for the annual conference of technology companies organized by the Tamir Fishman & Co. investment house.

DSP Communications Ltd., then a public company traded under the ticker DSPC, had cancelled its attendance at the last minute, amid rumors that the company was either about to be sold or issue a profit warning. That night, the company issued a dramatic press release that Intel Corp. (INTC) was acquiring the company for $36 per share - $1.6 billion, in cash.

Then-Intel CEO Craig Barrett said the acquisition was Intel’s bridgehead in the field of communications processors for a range of devices. For Gilo, who founded DSPC 14 years earlier, the acquisition was a gift from heaven, and not only because of his huge profit from the sale. Two and a half years previously, he had tried to take over Scitex (now Scailex Corp. (Nasdaq: SCIX)) in a billion-dollar deal, but was received by ridicule and superciliousness on the part its owners, the Recanati family, and then-chairman Dov Tadmor. They did not believe that this impudent young man who came out of nowhere could put such a deal together. After October 1999, no one had to ask, “Who is Davidi Gilo?”

Intel had great hopes in communications processors, and DSPC was the company’s second largest acquisition in the sector. Earlier that year, Intel acquired communications infrastructure processor developer LevelOne for $2.2 billion. One of LevelOne’s small competitors was Galileo Technology, which was sold to Marvell Technology Group (MRVL) in late 2000. The circle was closed Tuesday, when Marvell acquired parts of DSPC from Intel for $600 million.

It is hard to know what Intel has kept from the original DSPC deal, and what was sold to Marvell, and I think it's no exaggeration to say that Marvell bought most of what was DSPC’s businesses at close-out sale prices.

Intel failed in almost everything it touched in the communications and cellular processes sector. Its gamble on flash memory processors for mobile devices also failed, because it went in the direction of NOR technology, but last year, the market picked another technology as the winner -- NAND, developed by SanDisk Corp. (Nasdaq: SNDK), Samsung Corporation, and Toshiba. That is why Intel was recently forced to invest in a joint venture with Micron Technology Ltd. (MU) to produce NAND processors.

The company that Marvell is buying is on the right track to become a giant in the communications and storage processor sector, and I won’t be surprised if it fills in the flash square, which I think it lacks in the storage sector. We’ll never know, but people at Intel certainly must have wondered all this time whether they failed in the communications sector because of expensive failed acquisitions, and what would have happened had they acquired thriving Marvell or Broadcom Corp. (Nasdaq: BRCM) at the outset. Or maybe they failed because they broke a fundamental management rule, namely focus on what you know best, which in Intel’s case is computers. The gorilla in the cellular processor market was and remains Texas Instruments Inc. (NYSE: TXN).

In my opinion, Marvell or Broadcom under Intel’s management, but without the entrepreneurs who founded them, would have brought Intel to precisely the same result it reached yesterday: painful failure in the communications processors sector. Intel president and CEO Paul Otellini, who took up his post a year ago, still had great hopes in the cellular sector when he gave his people a pep talk at the start of his term: “Standards for cellular devices are being set without Intel, which set the standards for computers, and this worries me,” he said.

Yesterday’s sale of DSPC, or part of it, to Marvell means that Otellini has almost completely given up on cellular.

Published by Globes [online], Israel business news - www.globes.co.il - on June 28, 2006
© Copyright of Globes Publisher Itonut (1983) Ltd. 2006. Republished on Seeking Alpha with full permission.

Source: Marvell's Purchase of Intel Unit: The Essential Background