July 10, 2008 -- TranSwitch has entered into a definitive agreement to acquire Centillium Communications. With the move, TranSwitch, a provider of carrier-class semiconductor integrated circuits (ICs) for Ethernet over SONET/SDH, broadband access, and Carrier Ethernet applications, will diversify its product portfolio to include Centillium's Fiber-to-the-Home (FTTH) and Voice-over-Internet-Protocol (VoIP) ICs.
The acquisition is expected to strengthen TranSwitch's position in the next-generation communications semiconductor market; TranSwitch says the combined companies will have greater scale, a significantly improved expense structure and an enhanced global reach. Management of TranSwitch has identified approximately $10.5 million of annual expense savings and expects the transaction to be accretive to earnings in the first full quarter after closing, and significantly accretive in 2009.
"Centillium has a large number of important customers including Alcatel-Lucent, OKI, Samsung, ZTE and Tellabs. Their products have won significant industry recognition, and their Mustang chip is currently being used in OKI's ONU platform which is part of NTT's EPON based FTTH deployment," commented Dr. Santanu Das, CEO of TranSwitch. "We are particularly excited about Centillium's second recent design win in the FTTH platform of a second prominent supplier for this deployment. This platform is currently being qualified and we anticipate a ramp in early 2009. The Japanese government has made a major commitment to rolling out FTTH, and NTT's goal is to reach 20 million homes by 2010. This represents a major revenue opportunity for the company."
Under the terms of the agreement, TranSwitch will issue an aggregate of 25 million shares of common stock and $15 million, which will be allocated pro rata among holders of Centillium common stock and vested, in-the-money, stock options outstanding at the closing of the merger. Based on Centillium's capitalization as of July 9, 2009, Centillium shareholders would receive 0.5958 shares of TranSwitch common stock and $0.36 in cash for each share of Centillium common stock. Based on TranSwitch's closing share price on July 9, 2008, the total consideration values Centillium at $42.8 million or approximately $1.02 per share on a fully-diluted basis. Centillium shareholders will own approximately 16% of the combined company.
"This combination further strengthens TranSwitch's position in the platforms of Tier-1 equipment suppliers with contracts at carriers that have made significant financial commitments to upgrade their current infrastructures. These contracts include carriers in the UK, Korea, China, India and now Japan," added TranSwitch's Das. "We believe that as these deployments begin to ramp in volume, the combined company has the potential to significantly increase its revenue in 2009. As a larger company, we will enjoy a significantly better expense structure as well as stronger relationships with both customers and suppliers."
"Consolidation in the communications industry is both good and necessary, and the combined company will be significantly stronger and more profitable than either one by itself," added Faraj Aalaei, co-founder and CEO of Centillium, who will also serve on TranSwitch's board of directors upon closing of the transaction.
The boards of directors of both companies have unanimously approved the transaction which is subject to customary closing conditions, including the approval of Centillium's shareholders. The transaction is expected to close in the fourth quarter of 2008. Upon completion of the transaction, TranSwitch will have approximately 158 million fully diluted shares outstanding, with current TranSwitch shareholders owning approximately 84% and current Centillium shareholders owning approximately 16% of the combined company's shares.
Thomas Weisel Partners LLC, Signal Hill Capital Group LLC, and Northland Securities, Inc. served as financial advisors to TranSwitch. Pagemill Partners served as financial advisor to Centillium.