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Chip Startup’s Investment Includes Buyout Option

Laguna Niguel-based chip startup Symwave Inc. has lured a strategic investor that’s also a potential suitor.

Earlier this month, Hauppauge, N.Y.-based Standard Microsystems Corp. took a stake in Symwave with a $4 million investment.

The investment comes with an option for Standard Microsystems to acquire Symwave.

“It’s a really big deal for us and something that makes a ton of sense for both companies,” Symwave Chief Executive Yossi Cohen said. “We have set aside and agreed on the terms of a potential merger and they have the decision if they want to.”

The two companies have hashed out an undisclosed deal price and what conditions,such as sales targets,are needed to trigger a deal.

The deal “sets a tangible potential exit value for the company, versus riding the ups and downs of the market and the economy,” Cohen said. “It gives us pretty well-defined goals to work toward.”

As part of the investment, Standard Microsystems Chief Executive Christine King gets a seat on Symwave’s board.

Standard Microsystems could invest an additional $1.3 million in Symwave if the company’s other investors don’t up their stakes in the current round of funding.

The Business Journal estimates that Symwave has raised around $15 million in venture funding so far. The privately held company doesn’t disclose any financial details.

Investors include Kodiak Venture Partners and CMEA Capital.

Symwave makes chips for the next generation of universal serial bus ports, the most popular way of connecting consumer electronics to a PC.

The latest version of the ports, USB 3.0, transfers data about 10 times faster than existing ones. Symwave’s first chips, set to go into production later this year, are geared toward the next generation of portable external disk drives for consumers.

The company said it’s had talks with two big potential customers, both disk drive makers: Lake Forest’s Western Digital Corp. and Scotts Valley-based Seagate Technology LLC.

At a technology conference earlier this year, Symwave teamed up with Seagate to demonstrate its speedy data transfers with one of its external drives.

“We are going through the process of figuring out where we can get the biggest bang for our buck,” Cohen said. “We made an early bet on external storage.”


Use for Funds

The money raised from Standard Microsystems is set to be used for product development and to expand into other markets.

USB 3.0 is likely to ramp up in late 2010 and 2011 as it gets built into cameras, cell phones, digital video cameras and other consumer gadgets that hook up to a PC.

Standard Microsystems is a big supplier of chips for the current generation of USB 2.0 ports.

“In the semiconductor space, Standard Microsystems is one of the largest leaders in USB 2.0,” Cohen said. “We felt they were a company that could value us correctly and appreciate what Symwave is working on today.”

Publicly traded Standard Microsystems has yearly sales of around $300 million and had a recent market value of about $500 million.

The deal gets Symwave an “in” with potential customers that have been working with Standard Microsystems for years.

The company “is one of the strongest players in USB 2.0 and it’s the most successful player in monitors, media players and other USB hubs,” Cohen said.

A buyout of Symwave could bring a new product segment for Standard Microsystems,the fast-growing external storage market.

“What Symwave brings is immediate access to a whole new market segment that they don’t currently participate in,” Cohen said.

The deal also helped Symwave avoid the onerous task of raising another round of funding from venture capitalists in a down market.

“It means I didn’t have to go to VCs and try to raise more,” Cohen said. “Symwave is fully funded now all the way through profitability.”


Profitable

The company expects to turn a profit next year.

Earlier this year Symwave doubled its space in Laguna Niguel. It built a lab and hired more engineers, for a total of 20 workers here and about 100 in all.

Symwave moved its headquarters last year to Orange County from San Diego after hiring Cohen, an engineer who left Irvine’s Broadcom Corp. in 2008.

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