Hello, Mr. Chips

Baldwin Louie — Mon, 25 Jun 2001 15:00:00 -0700

Quick: Name the largest IPO in the history of the U.S. semiconductor industry.

It wasn't one of the giants, AMD or Intel (INTC). Neither was it the ballyhooed debut of Transmeta (TMTA) last November, nor a hot, new flat-panel chipmaker like Pixelworks (PXLW). The answer is Intersil, a company based in the tech hinterland of Irvine, Calif., which makes communications chips for wireless networks.

Spun off from 106-year-old Harris Semiconductor, Intersil went public in February 2000, raising $500 million. (While Lucent spinoff Agere Systems (AGR) raised $3.6 billion when it went public in March, it makes optical communications equipment in addition to semiconductors.)

Since then Intersil CEO Greg Williams, a 21-year veteran of GE and Motorola (MOT), has followed a policy of growth by subtraction. He pruned peripheral businesses, selling off Intersil's discrete power unit, which makes semiconductor power switches for cell phones and other devices, to Fairchild Semiconductor for $338 million. And he focused the company on the technology that has now emerged as the de facto standard for wireless networking, called 802.11b or "Wi-Fi."

The results are striking. With at least a 66 percent share, Intersil now dominates the growing market for chips for, short-range wireless networks in office buildings, homes and public spaces.

Though such networks, known as wireless local-area networks or WLANs, are in the early stages, they're enjoying grassroots support at the expense of more-widely hyped technologies such as Bluetooth. Analyst Brian Marshall of J.P. Morgan estimates the market for chips for wireless LANs at $220 million in 2001 and predicts growth of 45 percent to $320 million in 2002.

Intersil's share price, which got hammered in the semiconductor industry's downturn last fall, has surged 150 percent since April 1. (Last week it was trading around $34.) It has $600 million in cash and no debt. Not bad for a non-engineer who graduated from Detroit's Wayne State University, known more for its Automotive Research Institute than for producing tech entrepreneurs.

Recruited in 1998 to take over as chief executive officer of Harris Semiconductor, Williams quickly perceived that within Harris' motley product line was one very promising area: making semiconductors for wireless communications. It was a big gamble, Williams admits: A leveraged buyout in August 1999 left the company with $550 million in debt. Intersil's public offering six months later helped pay a lot of that off. Meanwhile, the wireless industry in the United States was enduring a period of helter-skelter expansion amid contradictory standards.

Unlike their counterparts in Europe - where global services mobile, or GSM, has long been the agreed-upon protocol for wireless communications - U.S. wireless providers have been unable to agree on a standard. [See table below] The result has been a proliferation of competing standards, some of which were developed to provide fully mobile service for devices, such as a handheld computer in someone's briefcase. The 802.11b system, by contrast, is a short-range technology: typically 100 meters or less, although powerful antennas can give it a range of several miles.

In the past few months, big tech companies including Cisco Systems (CSCO), Intel, and Microsoft (MSFT) have announced support for the wireless-LAN standard. Eventually, people carrying laptop computers or handheld devices may move from network to network as they go from home to office to airports, hotels, restaurants, sports stadiums and so on. And the vast majority of those devices will contain chipsets made by Intersil.

"The best part of this has been seeing people who worked at Harris for 20 years and never felt like winners," the self-effacing Williams says. "Now they feel like winners."

WACKED WIRELESS: The Standards Mess
802.11a
Backers: 3Com, Apple, Cisco, Intel, Nortel The next-generation version of 802.11 debuts early next year. It increases data throughput to 54Mbps (from today's 11Mbps) and moves to the less congested 5-GHz radio band. That could make it popular in homes that are cluttered with interfering cordless phones and baby monitors.
802.11b (Wi-Fi)
Backers: 3Com, Apple, Cisco, Intel, Nortel The current wireless network leader. Operates on the 2.4-GHz frequency and shuttles data at speeds up to 11Mbps. Despite interference and security issues, its affordability and heavyweight backers have made it the standard to beat.
802.11g
Backers: 3Com, Apple, Cisco, Intel, Nortel An extension to 802.11b, it moves data at speeds of at least 20Mbps and perhaps as high as 54Mbps. Available at the end of 2002, it's likely to be the corporate choice, since it is compatible with existing 802.11b products. Still needs FCC's blessing.
802.11e
Backers: ATT, Cisco, Intel Improves streaming-media performance for every flavor of 802.11. When it rolls out at the end of next year, it will bring great functionality to 802.11, but much later than HomeRF 2.0. No FCC approval yet.
HomeRF
Backers: Compaq, Motorola, National Semiconductor, Proxim, Siemens The current alternative to 802.11b. Also operates on the 2.4-GHz spectrum, but data moves at a poky 1.6Mbps. Less prone to interference than 802.11b, but it has been hurt by decreasing prices for 802.11b products and Intel's defection.
HomeRF 2.0
Backers: Compaq, Motorola, National Semiconductor, Proxim, Siemens Boosts to 10Mbps, but stays on the 2.4-GHz band, ensuring compatibility with existing HomeRF devices. Slower than 802.11, but voice and multimedia support could win consumers when it hits this year.
HyperLan2
Backers: Ericsson, Lucent, Xilink The emerging European standard, it operates on the 5-GHz band and boasts a 54Mbps data speed. Likely to be the Old World's choice for the short term.
By Alexei Oreskovic

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Hello, Mr. Chips