In March, PMC-Sierra Inc. (Nasdaq: PMCS) acquired Passave Inc. for $300 million in shares, the largest deal for an Israeli start-up this year. The acquisition was made while Passave was trying to go public on Nasdaq. As part of the acquisition, PMC-Sierra decided to set up an R&D center in Israel.
This week, PMC-Sierra VP and CTO Dr. Robert Yung visited Israel.
PMC-Sierra provides broadband communications and enterprise storage systems, as well as access, metro and mobile infrastructure and storage solutions. It has a market cap of $1.37 billion, and mainly produces and markets processors for the US telecommunications market. The acquisition of Passave is intended to help the company penetrate the fiber optic solutions market. Market sources predict that 45-60 million households worldwide will have fiber optic access by 2010.
Passave, now PMC-Sierra Israel, develops fiber-to-the-home (FTTH) broadband Internet solutions. It was the great Israeli start-up success story of the year. The company was founded five years ago and raised $10 million, and was sold for $300 million. The company has sales and is very profitable. Its investors, Intel Capital, BRM Capital, Eurofund and Walden Israel made double-digit returns on their investments.
Passave mainly operates in Japan, where it leads the FTTH revolution. 1.5 million Japanese households already have fiber optic-based Internet access, and 150,000 households are added each month. The company is the sole supplier to companies such as Hitachi Ltd. (NYSE:HIT; TSE:6501), Mitsubishi Corp. (TSE: 8058)(OTC: MSBHY.PK), NEC Corp. (Nasdaq: NIPNY; TSE: 6701), and Sumitomo Mitsui Financial Group, Inc. (SMFG) (TSE: 8316).
Passave was also the first company in the world to use passive optical networking (PON) standard fiber optics, invented by co-founder Ariel Maislos.
“Globes”: Did you pay too much for Passave?
Yung: “For us, the acquisition of Passave is a long-term acquisition. 2002 was not a good year for our industry, so we used the opportunity to assess new markets and review our long-term strategy. We are based on the telecom industry, but we look at other ways to improve the products and offer customers new ways to boost profits and cut costs. There are few companies in the world that use PON effectively, and there’s a market need for fiber-optic hook-ups not just for homes, but also for businesses, and not only in the Asia-Pacific region, but elsewhere too. We looked at Passave and assessed our options. We realized that this was a company we wanted to work with for at least the next ten years. We might have been able to buy another company more cheaply, but we chose the best company because this was a long-term investment. Furthermore, we’re sure that we can repeat the company’s success with future products.”
What did you find at Passave?
“Its technology, and not just that, but also its management team Ariel Maislos and Victor Vaisleib, who know how take ideas quickly to market. They have an especially strong core team, they understand customers and the market, which is at a turning point. There’s a large market outside the Asia-Pacific region that we intend to reach. Since I ran a venture capital fund (GSR Ventures - B.F.), I see companies all over the world, and I used to invest, too. I still make private investments and I’m an investor in the venture capital fund I founded. In the past two years, I’ve seen 400 technology start-ups in the US and China. Passave was special. In addition, the number of companies that have working products in the field can be counted on the fingers of one hand. There are a few dozen companies in the development stage. This company has a market estimated at over $1 billion, a good management team, and most importantly, paying customers. Passave had all the components, which was why they were the natural choice for us.”
Did you take a strategic decision that you wanted to operate in this sector?
“PON is the largest market segment we’re targeting. I believe that it will mature over the next two years, which will be reflected in commercial success. You should remember that the telecom industry takes a long time to absorb innovations. We’re talking about conservative customers. We meet the consumers’ needs and work on innovations because the market is already talking about GPON and 10-GigaPON. We have an appetite for this market. The new division will be big and we won’t hinder its rapid growth.
“For us, the acquisition was a first step. We’ll now expand the development team because I’m looking for a return on our investment.”
Will you invest more in setting up the R&D center? Wouldn’t it have been worthwhile to establish a center in India?
“The R&D center we’re setting up in Israel will get resources. The choice of Israel wasn’t problematic. I think that Israel, despite development in India and China, will keep its place. True, it might be possible to set up cheaper R&D centers elsewhere in the world, but Israel has the people and the know-how. Low cost is not necessarily a good idea when talking about a long-term investment. Cost is one consideration, but not the only one, when setting up an R&D center. Israel has quality manpower, a developed venture capital industry, and a good entrepreneurial climate. We’re building an infrastructure for the company that will grow and flourish. We also have R&D centers in the US, China and India, and we work with partners in Japan and Korea as well.”
Published by Globes [online], Israel business news - www.globes.co.il - on November 1, 2006
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