Broadcom to buy ServerWorks for $957 million

(Telephony) Broadcom today announced it will pay $957 million in stock to acquire ServerWorks, a manufacturer of high-performance system I/O integrated circuits for servers.

“The strategic reason for this transaction is the recognition that every single click on the Internet passes through at least one server,” said Broadcom President Henry T. Nicholas III. “One of the quickest and most effective ways of improving Internet performance is to advance and increase the performance of each and every server element.”

Broadcom intends to use this transaction as a vehicle to extend the existing networking standards for the LAN, WAN and storage-area networks to 10 gigabits, which the company believes is the speed at which these networks eventually will converge.

“Our plan is to converge those networks and allow them to interoperate by providing converged, multiprotocol systems based on servers,” Nicholas said.

Prior to the announcement, ServerWorks worked with Broadcom for the better part of a year and a half on the development of a Gigabit Ethernet MAC chip that supports both PCI and PCI-X interfaces. Broadcom introduced this chip last month.

However, the alliances ServerWorks shares with key players in the telecom industry were as important to Broadcom as its technologies, said Nicholas.

“ServerWorks has a number of very important strategic partnerships which are also extremely important to Broadcom and which we expect to invest in significantly and cultivate,” he explained. “One of the most important is with Intel.”

Intel has a strategic investment in ServerWorks through warrants to acquire about 5% of the company, which Nicholas anticipates Intel will exercise.

“We intend to expend significant effort to support the goals of the Intel enterprise server group. This transaction is really a recognition of the importance of the Intel architecture in moving forward and advancing server technology,” he said.

Under terms of the merger transaction, ServerWorks will become a wholly owned subsidiary of Broadcom, with current ServerWorks President Raju Vegesna continuing as president of the new subsidiary. He will report to Nicholas.

Broadcom will issue about 11 million shares of its Class A common stock in exchange for all outstanding shares of ServerWorks common stock. Broadcom shares held a value of $87 on the Nasdaq at the close of trading on Jan. 5. Up to 9 million additional shares of Broadcom stock are being reserved for future issuance, which will occur approximately a year from now provided the ServerWorks subsidiary meets certain performance goals. ServerWorks has roughly 100 employees and is 90% employee-owned.