The lofty goal of creating shareholder value doesn’t come easy,if at all.
For the past three years, Newport Beach’s Conexant Systems Inc. has been busy breaking up what once was a sprawling maker of chips with five plants, more than half a dozen units and layers of managers.
During the technology boom, creating shareholder value wasn’t an issue for Conexant. The chipmaker counted a market value of about $20 billion at its peak.
But then came the crash. By 2002, Conexant had lost nearly all,99%,of its market value. That sent Chief Executive Dwight Decker on a path of selling and spinning off businesses starting in 2002.
What’s left of Conexant is a maker of chips for modems, fax machines and home networking gear that counted a market value of about $720 million as of last week.
Conexant and its offspring aren’t likely to ever reach $20 billion in market value again. Yet, even after a massive makeover of Conexant, investors in the chipmaker still could be in the hole.
An analysis by the Business Journal shows a theoretical investor owning 100 shares of Conexant before the breakup had a more valuable stake then than now. In fact, at recent check, the investor would have lost money, far more than the 25% decline in the Philadelphia Semiconductor Sector Index for the same period.
Compounding the loss is a steep drop in the shares of Conexant and related companies last year. Before that, investors would have logged a $100 gain on their holdings.
Conexant’s take: It’s still too early for a definitive analysis on the impact the breakup had on shareholders.
“This is a longer term strategy that we need to judge over several years,” said Gwen Carlson, a Conexant spokeswoman.
Our analysis went something like this:
We took the value of 100 Conexant shares on March 12, 2002, the day before Conexant said it was spinning off Jazz Semiconductor Inc., the company’s former chip plant operation.
At $13.11 a share, the original Conexant stake was worth about $1,311.
In all, Conexant spun off four businesses: Jazz, which has been planning to go public for more than a year; Newport Beach-based Mindspeed Technologies Inc., which spun off in 2003; Conexant’s digital imaging unit, now part of Fremont-based ESS Technology Inc.; and its wireless chip unit, which now is part of Skyworks Solutions Inc. of Massachusetts.
Conexant itself combined with Red Bank, N.J.-based GlobespanVirata Inc. in early 2004 and shifted its headquarters to New Jersey for a time. The company moved back to Newport Beach late last year after Decker reassumed the chief executive’s slot in a bid to turn around the company.
All of the moves altered the value and concentration of Conexant stock for theoretical shareholders.
The Jazz deal gave Conexant a 45% stake in the new company, alongside majority owner Carlyle Group, a Washington, D.C.-based private equity firm.
Conexant shareholders didn’t get a direct stake in Jazz. After the split, the theoretical Conexant stake dipped to $1,248, based on the movement of Conexant’s stock itself. We assume the value of the Jazz split was reflected in Conexant’s stock price.
Jazz remains a variable. Conexant could get cash from selling its Jazz shares in an expected public offering. A Jazz offering could be worth $150 million in all.
Bad Timing
The stakes of Conexant shareholders really changed in June 2002, when Conexant split off its wireless division to form a joint venture with Woburn, Mass.-based Alpha Industries, creating Skyworks.
Conexant shareholders received about a third of a Skyworks share for each Conexant share they owned.
The timing of the deal proved bad for the theoretical Conexant investor: Shares of Conexant, Skyworks and other chipmakers plunged in mid-2004.
That took the hypothetical Conexant stake down to $350, or about $900 less than before the restructuring began.
In July 2002, Conexant sold off its digital imaging chip business as part of Pictos Technologies Inc. Conexant got an undisclosed amount of Pictos stock in the deal. Pictos later was sold to ESS Technology Inc. for $27 million.
Conexant got $12.2 million in cash from the sale, which presumably was implied in Conexant’s $1.57 share price at the time.
The theoretical investor’s stake by July 2002: $295.
Next came Conexant’s spinoff of Mindspeed Technologies, which makes chips for networking gear. It was to be Conexant’s marquee deal.
Conexant shareholders received one share of Mindspeed for every three Conexant shares. That helped push the theoretical investor’s stake up to $426.
Then in March 2004 came Conexant’s acquisition of GlobespanVirata. Shares of the combined company, which took the Conexant name, traded at $7.44 at the time the deal closed. Skyworks shares traded for $11.51. Mindspeed was at $8.30.
Hindsight being 20/20, here’s the point where our theoretical investor should have cashed out with a small profit. The stake checked in at $1,424 after the GlobespanVirata deal, $113 more than when the analysis started.
The chip stock downturn of mid-2004 laid waste to the small gain and then some. Today, the stake is worth about $535, a 60% loss.
Even so, the breakup arguably was the best option for Conexant, according to one analyst.
“It was absolutely the correct move,” said Lehman Brothers’ Arnab Chanda, who follows Conexant. “It created shareholder value if you add up the market value of all the companies they spun off. Where they messed up was with the Globespan merger. It was the right idea, but it was executed poorly.”
As of last week, Conexant, Mindspeed and Skyworks had a combined market value of $2 billion. ESS, which acquired Pictos, had a recent market value of $200 million, though, as with Skyworks, Conexant only can claim a portion of that value.
Then there’s Jazz, which plans to raise $150 million and could have a market value three times that.
Turnaround Effort
Conexant is working through a slump. Part of the problem is a downturn in chips that struck late last year. The other part is fixing the GlobespanVirata combination.
Decker orchestrated the GlobespanVirata buy and pulled back to chairman after the deal closed.
As part of the deal, former Globespan chief executive Armando Geday, who worked under Decker when Conexant was part of Rockwell International, took over running the combined company from New Jersey.
But the company floundered under Geday, hampered by market forces and integration woes.
Last year, Decker returned as chief executive, charged with turning around the struggling company. One of his first moves was to shift Conexant’s headquarters back to Newport Beach.
