Vitesse Unloads Storage Business

Ailing Vitesse Semiconductor Corp. (Nasdaq: VTSS) is selling off most of its storage-area networking business as management tries to lift the company back to profitability.

The sale, announced late yesterday, pretty much ends the company's fling with storage, an area that attracted Vitesse's attention back when its telecom business was flagging.

Maxim Integrated Products Inc. (Nasdaq: MXIM), a vendor of analog and mixed-signal chips, has signed an agreement to buy most of Vitesse's storage portfolio, including its Serial Attached SCSI (SAS) and Serial Attached ATA (SATA) chips. The deal is expected to close by year's end.

The price is $63 million in cash, plus $12 million if the products reach certain milestones. Adding to its cash pile, Vitesse separately landed a $30 million loan yesterday. (See Vitesse Sells Off Storage.)

Not included in the deal are Vitesse's Fibre Channel devices, which topped out at 2 Gbit/s -- a bad bet on Vitesse's part, as the 4-Gbit/s Fibre Channel market took off and has been kind to companies like PMC-Sierra Inc. (Nasdaq: PMCS). Vitesse is also hanging onto its RAID-on-chip line.The sale could save $2.5 million per quarter in expenses, Vitesse says. But Vitesse's revenues would slim down, too; storage accounted for 23 percent of revenues in the quarter ended in June.

Measured in terms of "consumption" -- sales to end customers -- the effect of the sale doesn't look as large. Vitesse says the parts being sold contributed about $20 million to the company's consumption during the 12 months ending in June. By contrast, Vitesse's total consumption for the June quarter alone was $60.5 million.

The deal arrives as Vitesse continues to grapple with accounting issues. Like many other companies, it's restating earnings to account for stock-options back-dating. But Vitesse also uncovered other misfires related to credits and payments. The result is that Vitesse will have to restate earnings back to at least 2002. Last year it fired some executives, including longtime CEO Louis Tomasetta. (See Vitesse Woes Worsen, Vitesse Restates Earnings, and Vitesse Execs Get the Axe.)

Along the way, Vitesse landed on the radar screen of hedge fund Chapman Capital LLC . Most recently, Chapman has needled Vitesse about not holding a 2007 shareholders meeting and questioned the addition of directors to Vitesse's board without shareholder input. (See Chapman Chides Vitesse, Again and Chapman Checks Vitesse BOD.)

Assuming the Maxim deal goes through, Vitesse would formally close its storage division, focusing its business on Ethernet and networking chips. The move isn't a huge surprise, says Andrew Schmitt, principal of Nyquist Capital ."Given the position they're in, it's a smart thing for them to narrow their focus and go back to their base," Schmitt says.

Vitesse began considering getting into storage-networking parts as early as 2001, trying to bolster revenues in the face of the telecom downturn. Competitors PMC-Sierra and Applied Micro Circuits Corp. (AMCC) (Nasdaq: AMCC) got similar ideas and eventually acquired their way into storage networking. (See Vitesse, Vixel Team on SANs, Chip Trio Faces Post-Bubble Blues, AMCC Moves Into Storage, and PMC Bites a Bit of Agilent.)

So, what's Vitesse going to do with all this cash? Some of it, anyway, is going toward paying off a previous loan from Tennenbaum Capital Partners . (See Vitesse Gets a Loan