The excellent Linley Group discusses Cortina’s recent acquisition of Immenstar, (my coverage here) a maker of FTTH silicon. Cortina is rapidly making itself as a consolidator communication silicon company and Linley speculates their next target might be a ’small VDSL vendor.’ That vendor would be Centillium (CTLM), though I feel it is a better match for suitors other than Cortina.
From the Linley Wire:
Over the past three years, Cortina has acquired Azanda, Intel’s optical products, and now Immenstar—a strategy that sets the bulked-up Cortina apart from wimpier single-product-line startups. With the Azanda acquisition, Cortina consolidated its component business for Cisco’s high-end routers. The acquisition from Intel more than quadrupled Cortina’s revenue and gave the startup access to most major communication OEMs. Most of the product lines acquired from Intel, however, were addressing mature markets. Immenstar gives Cortina access to the fast-growing PON market. Given the ease with which Cortina raises capital, we would not be surprised to see the company add to its broadband play with the acquisition of small VDSL vendor.
Centillium has a market cap of $76M but an enterprise value of $37M, all liquid (more of my opinion on Centillium here). Centillium also carries a large $21M non-cash liability on their books that I believe may never need to be paid. Removing the liability, the company is currently valued at $16M, less than 2x the most recent (and ugliest) quarterly revenue. It’s also valued at 1/2 the $29M in R&D expenditures made in the last 12 months.
The big negative is Centillium is feeding cash into the flames at a rate of $4.5M a quarter. It needs to be consolidated into a larger, more efficient entity. It makes no sense for $40M/year revenue companies to be public given the fixed costs associated with a Nasdaq listing. I believe that placing the operating entities of Centillium into a more efficient host would make the business cash flow positive immediately.
Next on the list is VDSL market share leader Ikanos (NASDAQ:IKAN) at around $120M enterprise value. It too has a large cash stash. That would be a large acquisition for a company the size of Cortina, and the VC investors still holding their stake in Ikanos firmly believe the company has a future as an independent entity. I agree.
At current valuations, any company (including Cortina) could acquire Centillium, milk the revenue stream, and make the acquisition work financially.
I believe a public company, like Conexant (NASDAQ:CNXT-RETIRED), PMC-Sierra (NASDAQ:PMCS) or even Broadcom (BRCM) are more likely suitors. As public companies, they can issue shares for Centillium and reap the large cash balance. They would acquire a revenue stream, some useful R&D and future products, and a lump sum of cash for stock. Think of it as an indirect secondary offering.
PMC Sierra is the best match, given it would eliminate a desparate FTTH silicon vendor who is distorting pricing, acquire a DSL product to complete its access portfolio, and pick up an extremely complementary high-density VoIP product.
Even Ikanos would make sense at it would consolidate competition and give them FTTH products, though I would argue they don’t need the distraction now.
One thing is clear - there is no incentive for private investors to bankroll Cortina to acquire mostly cash. There is a better incentive for other public companies to issue shares to capture it.
Full Disclosure: Author is long Centillium and Ikanos.
CTLM 1-yr chart