Broadcom Falls On

comes back to Wall Street Co-founders, Intel are sellers in chip maker's follow-on

By Darren Chervitz

IRVINE, Texas - Shares of Broadcom fell 7.4 percent Wednesday after the chip maker registered to sell 3 million shares in a secondary offering, and recent history suggests that the company's stock price could come under more pressure.

Irvine, Calif.-based Broadcom (BRCM) will only be selling about 392,000 shares in the follow-on offering, which comes just five months after the company's initial public offering. The rest of the shares are being sold by Broadcom management and early investors.

Co-founder and Chief Executive Officer Henry Nicholas will be selling 450,000 shares of his 11 million-share stake, as will co-founder and Chief Technical Officer Henry Samueli. Intel (INTC), meanwhile, will be shedding 40 percent of its stake, or 637,500 shares, and Scientific-Atlanta (SFA) will sell 340,000 shares, or 22 percent, of its Broadcom holdings.

"It's a bit disconcerting that management and supposedly savvy investors are looking to sell more stock, especially in a depressed market," said Steve Tuen, research director of the IPO Value Monitor.

Cisco Systems (CSCO) and General Instrument (GIC), two other important Broadcom backers and customers, are not planning to unload shares in the secondary offering.

Broadcom shares fell 5 1/4 to 65 3/4 Thursday.

In its short life as a public company, Broadcom has been nothing but kind to investors, especially those fortunate enough to have gotten in at the IPO price. The stock has gained more than 175 percent above the $24 offering price - making Broadcom the fourth-best performer this year in an overall dreary new-issue market - and has never fallen below 47.

Broadcom, which makes semiconductors used in high-speed data transmission devices, including cable modems and set-stop boxes, has delivered better-than-expected financial results and recently announced single-chip technology for cable modems, which should help bring modem prices down to a more user-friendly level. Broadcom's chips are also used in products for the Ethernet networking, digital broadcast satellite and digital subscriber line (or DSL) markets.

On Wednesday, Broadcom announced that Scientific-Atlanta agreed to buy a minimum of 500,000 cable modem chips during 1999.

Broadcom spokeswoman Cristine Morris declined to comment, citing a "quiet period" associated with the registration of the stock offering.
Follow-on offerings can often place pressure on a company's stock price, since they create short-term supply-and-demand imbalances. Broadcom's float, or the number of freely trading shares, will increase to 8.26 million from about 5.25 million shares.

In addition, some of the company's approximately 36 million other outstanding shares could be added to the float after the company's original lock-up period ends on Oct. 14. (Certain shareholders who were granted an early release of part otheir stake in August have agreed to an extended lock-up period that ends Nov. 14.)

Lock-up periods, often implemented when a company sells stock to the public, forbid certain insiders to sell their shares. Even after a lock-up period ends, however, not all of those shares become part of the float. Management and other large investors, who have agreed not to sell stock for 90 days after the completion of the follow-on, must still register their shares in separate Securities and Exchange Commission filings.

In a prospectus filed with the SEC, Broadcom said the proceeds from the follow-on offering -- which at recent share prices would be about $26.5 million -- along with the IPO's proceeds and cash generated by operations will be sufficient to meet capital requirements for at least the next year.

The company, however, also said in its prospectus that it "may elect to sell additional equity securities or obtain additional credit facilities." That phrase wasn't included in Broadcom's original IPO filing in February, when Broadcom said that its "existing capital resources, including the net proceeds of this offering, will be adequate to satisfy ... current capital requirements through 1998."

Companies that are able to complete secondary offerings, especially when financing is as tough to come by as it's been for much of this year, usually have experienced strong stock-price gains. But for investors, secondary offerings often are a cause for caution.

Since last September, of the 27 companies that have gone public and made quick return trips to Wall Street for more money, about 75 percent have seen their stock prices fall after the secondary offerings were completed, according to CommScan.'s EquiDesk.

In many cases, the fall has been precipitous. For instance, SportsLine USA (SPLN) is up 118 percent from its offering price but has dropped nearly 54 percent since its $150.5 million follow-on in April. Other stocks that have taken huge post-secondary hits: Avis Rent-a-Car (AVI), off 37 percent; Artisan Components (ARTI), off 59 percent; CDnow (CDNW), off 51 percent; Global TeleSystems (GTSG), off 26 percent; InterVu (ITVU), off 32 percent; Ivex Packaging, off 40 percent; Metronet Communications, off 38 percent; N2K (NTKI), off 78 percent; Preview Travel (PTVL), off 36 percent; SCM Microsystems (SCMM), off 28 percent; and USWeb (USWB), off 41 percent.

To be sure, the market as a whole has fallen significantly since July, but analysts say that at least some of the stock-price losses can be attributed to the increase in a company's 2float. "Old market lore," said John Bollinger, president of Bollinger Capital Management, has it "that secondaries are bad news."

Amazon.com (AMZN) and its CEO, Jeff Bezos, a former investment banker, have been praised for issuing bonds to raise more money, which kept the stock float low and the pressure on short sellers.

"I know of no such negative wisdom regardin bond offerings," Bollinger said.

Darren Chervitz is a reporter for CBS MarketWatch.