Chip Giant Intel Plans to Acquire Level One in $2.2-Billion Deal

SAN FRANCISCO —  Intel Corp. said Thursday that it would acquire Level One Communications Inc., a leading maker of microprocessors for high-speed communications, in a stock-swap valued at about $2.2 billion.

The acquisition would give Intel a foothold in a new arena--supplying the silicon chips for equipment that manages Internet and intranet traffic.

Intel, the dominant maker of PC microprocessors, is already a top producer of network interface cards for PCs and also makes hubs, switches and routers--equipment that carries network communications--for small-to-medium businesses.

“But they don’t make much of the silicon that goes into those boxes,” said Nathan Brookwood, an industry analyst with Insight 64 in Saratoga, Calif. “This will allow them to create their own silicon for those products and become a provider to others”--a highly lucrative niche.

The deal stunned investors. On Thursday, Level One shares plunged $5.25 to close at $27.13 on Nasdaq, before the deal was announced. Shares of Santa Clara, Calif.-based Intel dipped $1.31 to close at $113.38, also on Nasdaq.

Intel’s offer of 0.43 of an Intel share for each Level One share values Level One at $48.75 a share. That is well above Level One’s peak of $44.38 reached earlier this year, having run up on rumors of a deal. The stock then plunged as traders bet no deal would materialize.

Mark A. Christensen, vice president and general manager of Intel’s Network Communications Group, said the acquisition in no way reflects aspirations to take on San Jose-based Cisco Systems Inc. or the other major providers of telecommunications equipment to large corporations.

But the purchase shows Intel’s desire to be a comprehensive provider of equipment for small-to-medium businesses and its intention to dominate in that arena.

“We will buy, license or develop any technology that it takes to be No. 1,” Christensen said.

Ashok Kumar, an analyst with the investment banker Piper Jaffray in Minneapolis, called the acquisition a smart move for the microprocessor giant for several reasons.

“Level One is a broad-based supplier in the data networking and telecom market--one of the more established players in this specialized arena,” he said. “It has assembled a core group that is very talented. For Intel to replicate that kind of capability in-house would have been close to impossible.”

The Level One deal continues a series of at least 25 Intel investments to promote high-speed networking, including a minority stake in a Level One competitor, Irvine-based Broadcom Corp.

But most of Intel’s previous networking stakes have been designed to popularize applications that require faster PCs, thereby increasing demand for the ever-faster microprocessors Intel supplies to computer makers. The Level One purchase may be the first step in a more comprehensive network strategy that helps push PC sales but also allows Intel to profit in a more direct way from the development of the network infrastructure.

The acquisition of Level One, an 800-person company based in Sacramento, should be completed by the end of June. No layoffs are planned, said Robert Pepper, Level One’s chief executive. Pepper, highly regarded in the microchip industry, will continue to manage Level One operations as an Intel vice president.

Times staff writer Tom Petruno contributed to this report.