Conexant Unit to Merge With Rival Alpha

Conexant Systems Inc. said Monday that it will spin off its wireless communications business and merge it with rival Alpha Industries Inc. in a stock swap to create one of the largest makers of communications chips for cellular telephones.

The combined company, as yet unnamed, would initially have about 4,000 employees and $600 million in annual sales, or about 12% of a fragmented wireless market.

The deal is expected to spark further consolidation in an industry with numerous smaller players, said Samuel S. May, a U.S. Bancorp Piper Jaffray analyst in Portland, Ore. “It’s a shot across the bow saying, ‘Let the games begin.’”

For Conexant and Alpha, the key strategy is to provide cell phone makers such as Motorola Inc., Nokia and others with a one-stop shop for electronics and an engineering corps to help develop new products.

The strategy ultimately is aimed at driving down prices of cell phones and providing more options for consumers, said executives at both companies. “The handset market is moving toward lower cost and more functionality,” said Dwight W. Decker, chairman and chief executive of Newport Beach-based Conexant.

Alpha’s stock soared $5.15, or 24%, to $26.35 a share on Nasdaq, giving the new company a value of $3.8 billion.

Conexant stock edged up 71 cents to $16.57 a share, which analysts saw as a cautious reaction to what will remain of the company: a broadband business that makes chips for high-speed modems, games and other electronics and a sluggish Internet equipment operation called Mindspeed Technologies, which Conexant plans to spin off as well.

The new Alpha-Conexant company, initially headquartered both in Newport Beach and at Alpha offices in Woburn, Mass., would be the largest wireless chip company able to give its manufacturers a complete package of electronics, say analysts and executives at the companies. Its competitors in providing total packages would be smaller firms such as RF Micro Devices Inc. in Greensboro, N.C., Triquint Semiconductor Inc. in Hillsboro, Ore., and Anadigics Inc. in Warren, N.J. There are numerous competitors, including some cell-phone companies, for individual parts.

Alpha’s president and chief executive, David J. Aldrich, started the merger talks several months ago with the idea of using Conexant’s low-cost manufacturing to build more semiconductor modules, which contain packages of chips that provide cell phones with more electronic features.

Wall Street hailed the merger.

“I think it’s a great deal for shareholders, employees and customers of the new company,” said Dale R. Pfau, a CIBC World Markets analyst in San Francisco.

“This creates a dominant market player that can gain economies of scale in operations, has superior operating talent at Alpha, is the largest supplier with the broadest platform of products and has all the [original equipment makers] as customers,” he said.

Conexant, itself a 1998 spin-off from Rockwell International Corp., has been criticized for holding onto its mix of businesses, especially Mindspeed. Analysts said the spin-off of the wireless business shows that the company is moving to unlock shareholder value long hidden in each of its operations.

What both analysts and executives at the companies like about the merger is that the product lines and customers mostly complement each other. Conexant’s power amplifiers often sit side-by-side with Alpha switches on cell-phone circuit boards. Alpha’s biggest customers are Motorola and Sony Ericsson, and Conexant’s largest are Nokia and Samsung Electronics.

The deal calls for Conexant to spin off its wireless business along with a plant in Newbury Park that would be merged with Alpha. Conexant investors would receive 0.342 share and Alpha investors would get one share for each share owned. Conexant shareholders would end up with 67% of the company.

Decker would become chairman and Aldrich chief executive of the new company. Analysts said Alpha managers, well-regarded in the industry for their capabilities, would be running the operation.

Pending shareholder approval and government clearance, the transaction is expected to close by the end of June.