PMC-Sierra to buy Passave for $300M

SAN FRANCISCO (MarketWatch) – PMC-Sierra Inc. said late Tuesday it will pay $300 million in stock to acquire Passave Inc., a privately-held maker of chips, bolstering its product line used to power high-speed Internet gear.

The transaction, expected to close this month, will be neutral to PMC’s earnings in the short term and will add to earnings “in three quarters,” the company said in a statement.

It is PMC-Sierra’s second acquisition in the past five months as it seeks to add complementary technologies to its product line-up. It recently closed its $425 million cash acquisition of Avago Technologies’ storage-chip unit.

Based in Santa Clara, Calif., PMC-Sierra
sells chips to Cisco Systems Inc. and other makers of Internet equipment used in high-speed broadband networks. The market for such gear is growing as telephone companies look to offer faster Internet connections to compete with cable service providers.

Passave, also based in Santa Clara, makes chips and related software tools that allow Internet service providers to offer voice, video and data services to households at rates higher than DSL-based networks.

Passave had registered with U.S. securities regulators last August for an initial public offering of stock that it expected would raise about $75 million.

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The firm was founded in January 2001 and employs 150 workers worldwide in Israel, California, Japan, Korea and China, according to a statement from PMC. Passave’s sales more than doubled to $43.2 million last year, PMC-Sierra Chief Financial Officer Alan Krock said in a conference call. He did not give an annual net income figure but said Passave’s gross profit margin was 60% of sales.

For the nine months ended Sept. 30, 2005, Passave reported net income of $1.2 million, according to the last IPO document it filed with the Securities and Exchange Commission.

Passave first started making volume shipments of its chips in the fall of 2004 with customers Fujitsu, Mitsubishi Electric & Electronics, and Sumitomo Electric Industries.

At this point, nearly all of its technology is being deployed in Japan. Next up is China and Korea with United States to follow, PMC-Sierra executives said in a conference call.

PMC-Sierra’s shares have soared about 60% this year amid optimism the company will benefit from increased spending by telecom equipment makers and Internet service providers.

PMC-Sierra’s management has said telecom companies are putting more capital to work, especially for cell-phone base stations that support the next generation of mobile phones known as 3G.

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It also has said Internet service providers are upgrading their data-storage capabilities due to increased consumer downloads of music and videos.

In after-hours trading, PMC-Sierra shares added 14 cents to $12.40.

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