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Conexant spin-off questions include which company Dwight Decker will head

Conexant Systems Inc.’s recent spin-off announcement may have surprised many, occurring less than two years after the company itself emerged from parent Rockwell International Corp.

But in some ways, the move should have been a foregone conclusion.

Even before Conexant completed its break from Rockwell last year,a move designed to free the communications chip maker from its old-economy parent,the death knell had begun ringing for Conexant’s mainline dial-up modem business.

Granted, modem chips are a cash cow now, generating about $184 million in Conexant’s most recently reported quarter and representing the largest single business unit at about 35% of sales.

But with the emergence of high-speed Internet access, cable modems and even sexy wireless Web access, the days of the lowly dial-up modem clearly are numbered.

That’s why Conexant has moved beyond modems and into some of the hottest segments of the communications sector. Trouble is, many investors still equate it with modems.

The distinction became painfully obvious this year as Broadcom Corp., the Irvine chip maker that competes with Conexant in several areas, more than tripled its market value to $54 billion. During the same time period, Conexant’s market value barely has budged at $11 billion or so, with two consecutive quarterly losses and stagnant revenue.

So Conexant plans to spin off the bulk of its network access division into a new company focused on chips used in hardware that manages the flow of data over the Internet and other networks.

The remaining operation,a $1.5 billion-annual-sales agglomeration of Conexant’s wireless, dial-up modem, digital infotainment and personal imaging chip businesses,will focus on networking products for the homes and small businesses. Under its current structure, Conexant’s units are broken down by customer, making the spin-off a clean one.

Dial-up modem technology might be waning, but customers who use Conexant’s chips are mostly the same customers who will turn to the new company for chips in their broadband equipment, said Kaufman Bros. analyst Alvin Kressler, making it premature to dismiss the personal networking business as a company on life support.

“It’s not an exciting business that enjoys 100% year-over-year growth,” he said. “But it’s a $2 billion company with the potential for 25% per year growth. And that’s not a bad business.”

Conexant officials aren’t saying much about where Chief Executive Dwight Decker or other executives will wind up, though it’s assumed Decker will have a board seat on both companies.

Division managers such as wireless head Moiz Beguwala, digital info-tainment’s Anthony D’Augustine, personal computing’s F.M. Rhodes and personal imaging’s Kevin Strong likely will stay with the personal networking side.

Network access division head Raouf Halim could take on a top role at the new company, which also will take in Conexant’s six most recent acquisitions. Those purchases occurred in the past six months in a torrent of activity de- signed to shore up Conexant’s Internet networking expertise.

What isn’t clear is whether Decker will head the new company or the old.

On one hand, the 49-year-old Canada native has sentimental attachment to the dial-up modem business, a market he fought to create at Rockwell, even as his insistence threatened his career there.

But on the other hand, the old-line business reportedly is as close as a company can be to being on autopilot, with strong divisional leaders, a gross margin that ranges from 45% to 65% and market dominance in its niches. And though it’s the smaller of the two halves at around $500 million in annual sales, the infrastructure business is expected to be the fastest growing.

Virtually all of Conexant’s top-level executives are Rockwell veterans, and according an insider, some have been pining for higher-level positions for months. The top slot that Decker declines would be a plum they surely have their eyes on.

Although there’s not much overlap between customers of the divisions, the technologies often share engineering know-how, a dynamic Broadcom uses extensively in its diverse product line.

Broadcom dominates many of those areas, but Conexant is strong in wireless and lower-end digital subscriber line technology such as ADSL. Broadcom has concentrated most of its DSL efforts on high-end VDSL used to transmit video signals and other massive loads of data.

The split will add another player in what has become an intense Orange County rivalry between Conexant and Broadcom. Though the companies have long been compared with one another because of their involvement in high-speed communications, they only recently began squaring off directly.

Thanks to their experience with the Rockwell spin-off, most Conexant employees are ready for this one, officials said.

“Having gone through the process a year and a half ago, this will be a lot smoother,” said Thomas Stites, Conexant’s senior vice president for communications. “The hardest part is coming up with a name. And unfortunately, the IPO process doesn’t give you a lot of time to do that.” n

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