Sierra Semiconductor jumps on exit plan .
Martin Wolk
SEATTLE 1996-08-29
Sierra Semiconductor Corp jumped 23 percent Thursday on the expectation the company would emerge as a smaller but more profitable operation after its planned exit from the computer modem business .
The San Jose , Calif. , company was up 2-1/8 at 11-3/8 after its announcement Wednesday that it planned to pull out of the highly competitive modem-chip business and focus instead on the fast-growing market for computer networking equipment .
" Certainly the company will be a much smaller company now , but it will be a more profitable business , " said analyst Elias Moosa of Roberston Stephens & Co .
But analysts noted that Sierra still has much painful work ahead of it , including cutting as many as 150 jobs from its workforce , which currently has 500 people , and building up the business of its PMC-Sierra unit , which makes routing devices and chipsets for high-speed computer networks .
The company has announced plans to take a charge against earnings of $ 50 million to $ 80 million to write down the value of assets and inventories and cover severance payments .
Scott Randall of Soundview Financial Group said the company likely would have difficulty selling its modem-chip business .
" Once you announce your intention to exit a business , it becomes a complete buyer 's market , " he said .
And he said that while the company is focusing on the fastest-growing part of its business , the market for networking chips has begun to attract the attention of much-larger players such as International Business Machines Corp .
" As the market develops the question is , are they able to make that transition to be a much larger company ? "
Randall said .
Other analysts were more bullish , even though the company is expected to shrink to slightly more than half its current size in sales .
" It 's a positive strategic move , " said Miles Kan of Hambrecht & Quist .
" The modem business is a low-margin , commodity business , " he said .
The company 's PMC-Sierra unit generated $ 33 million of the company 's $ 117 million in sales in the first half of the year , compared with $ 45 million in sales of modem chips , Kan said .
But the PMC unit is far more profitable , he said .
Sierra 's stock has fallen from a high of nearly $ 25 this year as the computer chip sector has been battered by falling prices and concern about slowing demand .
-- Seattle bureau 206-386-4848