Company Funding, Acquisition Sprees Stalled Out in 2001
By RAJIV VYAS
2001 saw venture investing and acquisition sprees by Orange County technology companies slow to a trickle.
During the peak of the tech boom, OC companies such as Conexant Systems Inc. and Western Digital Corp. joined venture capital firms in backing startups with strategic investments.
Other, such as Broadcom Corp. and Microsemi Corp., simply bought up smaller companies deemed to be tactical.
But in 2001, OC’s corporate investors and acquirers joined a national trend. During the first half of the year, corporate venture investments dropped by 91% from the year-ago period, according to Pricewater-houseCoopers. In 2000, national corporate venture funding hit $6 billion.
“There are three reasons why companies have slowed down their investing,” said Randy Lunn, general partner at Irvine-based venture capital firm Palomar Ventures. “There is a less rich target space. (Corporate investors have) problems with their current portfolios. And third, stock prices have come down so they don’t have the currency to make acquisitions.”
In 2000, Newport Beach-based Conexant Systems invested more than $50 million in 10 startups. Last year, the chipmaker invested around $10 million in three companies, an 80% drop.
“We have significantly slowed down our investment activity,” said Sanjay Gokhale, executive director of strategy and business development at Conexant. “That is not to say that we have stopped totally, but it is significantly slower than (2000).”
Two of the three investments Conexant made came in January 2001, before the climax of the tech meltdown. The other Conexant investment came in the second half of the year.
Like other tech companies, Conexant’s own problems and bad experiences with past investments prompted it to take a hard look at any new venture placements. For the 12 months ended Sept. 30, Conexant wrote down $13.1 million associated with investments.
The company’s portfolio includes an investment in Irvine-based Valence Semiconductor Inc., a promising chip designer that released its first product in the fall. Among Conexant’s bombs: a late-2000 investment in Winfire Inc., a Newport Beach high-speed Internet company that folded last year.
Lake Forest-based Western Digital Corp. is a co-investor with Conexant in Valence Semiconductor. The disk drive maker also has funded several internal projects and offshoot companies.
In 1999 and 2000, Western Digital invested in five ventures that were seen as “peripheral” to its core market of drives for personal computers. But the company was more cautious last year.
“We have not invested in any new ventures” in 2001 said Jim Morris, vice president of business development at Western Digital. “We have taken a disciplined approach towards this sort of activity.”
Among the companies Western Digital has set up: SageTree Inc. makes supply chain management software, and Keen Personal Media Inc. makes set-top box products. Western Digital recently sold two others, SANavigator Inc., a maker of software that helps manage storage networks, and Connex Inc., a designer of network storage products, for a total of $35 million.
But between the fourth quarter of 2000 and the third quarter of 2001, Western Digital wrote down $51 million related to its investments.
Just a couple of years ago, OC-based technology companies were flush with cash to make investments. With the booming economy, the appetite for risk was higher. In 1999 and 2000, Conexant was profitable and the company had raised $1 billion through two bond issues.
But in 2001, the chipmaker was dealing with an industry downturn that manifested in mounting losses, layoffs and a disgruntled creditor. In May, Credit Suisse First Boston Corp., Conexant’s lead investment banker, backed out of a $475 million line of credit for the Conexant.
These days, “(technology companies that are) base businesses need more attention,” Palomar’s Lunn said. “They need to fix the problems that they have.”
Acquisitions,another way OC tech companies have sought to tap startups,also tapered off in 2001.
Irvine-based Broadcom, which acquired 11 companies in 2000 and five in 1999, decided to go relatively slow last year. The chipmaker bought just four businesses last year, including Santa Ana-based KimaLink.
Irvine-based Microsemi, another chipmaker that also opts for acquisitions over strategic investments, was less aggressive, too. After making two buys in 1999 and 2000, Microsemi stayed on the sidelines in 2001 by not making any deals.
Corporate investments and acquisitions have played a key role in OC’s tech sector. Oracle Inc., Alcatel, Intel Corp. and others have made strategic investments in local companies, including Irvine-based Access-360, Lake Forest-based VSK Photonics Inc. and Irvine’s TransDimension Inc.
Other OC companies have been swallowed by bigger fish looking to grow through acquisitions. Those including Corollary Inc. (now part of Intel), Johnson-Grace Co. (part of what’s now AOL Time Warner Inc.) and NewPort Communications Inc. (snared by Broad-com).
