Conexant Systems Inc. is a shadow of its former self.
But that’s fine by Chief Executive Scott Mercer, who has spent his first year on the job helping the Newport Beach-based chipmaker trim down to fighting weight.
Mercer has jettisoned underperforming product lines, shed units that weren’t profitable or growing, extended its line of credit and made small acquisitions to help get into markets that are set to see growth.
“We are going to be in businesses where we can make money,” Mercer said. “Now with the remaining product lines, we are in businesses where we are either No. 1 or No. 2 in each of those markets. It seems basic, but it makes sense.”
Last month, Conexant agreed to sell its DSL and broadband chip product line to Fremont-based Ikanos Communications Inc. for $54 million. The deal is expected to close this summer with roughly 400 workers set to join Ikanos.
Last year, the company sold off its business making chips for set-top TV boxes for up to $145 million to NXP Semiconductors, the former chip arm of Royal Philips Electronics NV. Some 700 Conexant workers since have joined NXP.
“The first task was disposing of these businesses, and that was well under way by the time I stepped in,” Mercer said. “I think we found very good homes for them in both cases.”
Both the set-top box and DSL chip businesses were underperforming.
Conexant had been investing in them for years, but couldn’t compete with the chip kingpin down the road: Irvine’s Broadcom Corp.
Conexant struggled to maintain its market share and also was up against Germany’s Infineon Technologies AG.
“We were waking up every morning competing with Broadcom,not necessarily the best place to be for a small company,” Mercer said.
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Old days: Conexant once was among the few to actually produce chips here; Newport Beach chip plant now part of Isreal’s Tower Semiconductor |
The leaner, meaner Conexant now is better positioned for a turnaround, Mercer said.
At its peak in early 2000, Conexant had a market value of about $24 billion.
These days, its shares are lightly traded and only a few financial analysts track the stock.
Conexant’s shares are off 70% in the past 12 months on a recent market value of about $70 million.
Mercer’s now set to focus on reworking the company’s debt.
At the end of March, Conexant reported some $525 million in short- and long-term debt.
“The challenge we have over time is dealing with the residual balance sheet effects of these years of investing in businesses like set top boxes and DSL,” he said. “It’s perhaps a bit outsized for our model. So that’s the next major challenge that we’ll be working on.”
The company now has some 300 workers locally and 1,100 in all.
“We think that when we complete the sale of the DSL business, we’ll be a much smaller company, but we’ll have a very attractive profit and loss model,” he said.
Product Lines
The company is focusing on four major product lines.
n The imaging group, which makes chips that go into multifunction inkjet and laser printers, photo printers, digital photo frames and fax machines.
n The audio group, which makes chips for computer sound systems, laptop docking stations, intercoms and voice-over-Internet-protocol speakers.
n The video group, which makes chips for video surveillance and security cameras.
n And the modem group, which makes embedded modem chips that go into computers, set-top boxes, cash register computers and security systems, as well as help monitor utilities.
In each product line, Conexant has a good chunk of the market.
“Although we have some competitors, we have very formidable market positions in each of those businesses, so that really helps on the performance side,” Mercer said.
Executive Shifts
When Mercer took the helm at Conexant a year ago, the company had seen some turmoil at the top.
He got the post after Dan Artusi, a veteran of Motorola Inc.’s chip arm, stayed only for about nine months as chief executive.
He’s said to have been ousted by the board after clashes with directors over the pace and scope of a big restructuring effort.
“The main challenge when I came on board was to go faster,” Mercer said. “We were in businesses we had to get out of. We really had to move quickly to execute a strategy that we had talked about at the board level.”
Dwight Decker, a former Conexant chairman and longtime chief executive who still has a seat on its board, is on his second stab at retirement after he tried to step back some years ago. He used to run the company when it was a chip arm of Rockwell International Corp., which spun off Conexant in 1999. After stepping down once, he was brought back in 2005 to fix a botched combination with New Jersey’s GlobespanVirata Inc.
Mercer had been on Conexant’s board since 2003.
He’s had stints at some big names, including Western Digital Corp., Dell Inc., TeraLogic Inc. and LSI Corp.
Mercer, 58, has helped Conexant swallow a bitter pill and is upfront about the problems that have plagued the company.
“We obviously have a balance sheet issue that we have to deal with over the next couple years in terms of rationalizing the capital structure and getting the proper debt structure to go forward,” he said.
Conexant still is adjusting to its new size.
That includes figuring out where it fits into the competitive landscape among chipmakers, which have seen a wave of consolidation during the past year or so.
“With a better balance sheet, we could have been one of the companies rolling up other companies and consolidating the industry,” Mercer said. “But we just couldn’t do that.”
