Broadcom buys Dune Networks for $200 million

Broadcom, one of the world's largest fabless semiconductor companies, announced on Monday that it has signed a definitive agreement to acquire Dune Networks, a privately owned Israeli start-up that develops switch fabric solutions for data center and networking equipment. Broadcom said it expects to pay about $178 million for Dune. The actual amount of the deal, which has not been announced to the press, is likely about $200 million, including Dune Networks' cash assets.

The acquisition of Dune Networks heralds the emergence of some new millionaires. The firm's founders, Eyal Dagan, Michal Kahan and Ofer Iny, along with the firm's employees, own 20% of the company's shares. Since the exact distribution of the company's preferred shares is unknown, its hard to say exactly how much its founders stand to pocket from the deal. Sources close to the firm's management say the founders and employees will be dividing up about $40 million, and the rest will go to investors.

Boaz Dinti, a partner in Evergreen Venture Partners, says the investment in Dune Networks has turned out to be exceptionally successful. "Evergreen invested in the company eight months ago, and there is no doubt that our decision to invest in either more mature companies that are close to achieving operating profit or in very young companies was a good one. I don't want to get into numbers, but we made hundreds of percent on this exit. This is the first exit by Evergreen's fifth venture capital fund."

Indeed, there is nothing shabby about the deal for Evergreen. The VC fund provided $8 million of the $8.3 million invested in Dune Networks' most recent round of financing, an investment that is yielding three times that amount within eight months.

Dune's other venture capital fund investors include Jerusalem Venture Partners, Pitango, early investors in the company, Aurum-SBC Ventures, Alta Berkley Ventures, Marvel, Cipio Partners, which acquired Siemens' holdings, and USVP. Each of the funds own a stake in Dune of 10% to 14%.

Dune Networks was founded in October 2000 by Dagan, the former vice president of research and development at MRV in Israel. Dagan founded the company Charlotte's Web Networks in 1998, which developed a fast communications router that would compete with Cisco and Juniper products. In August of 2000, Dagan left the company to found Dune Networks, taking with him two of the firm's top managers.

Dune Networks develops chipsets for communications equipment that connect data center servers in large enterprises. Its components are able to handle data relay of up to 100 gigabytes per second per port. The chipsets are used in multi-server Ethernet protocol switches in data centers. Dune's competitors are Broadcom, which has now acquired the company; Marvel, which owns a stake in the firm; and Fulcrum Microsystems.

The need to manage data traffic based on surfer demand arose with the development of cloud computing, involving huge physical server farms to provide storage with processing performed on the Internet. The current acquisition, which should be completed before March 31, 2010, supplements Broadcom's impressive arsenal of communication chipsets. Extension of its investment portfolio in the area of network switching for data centers will enable Broadcom to meet increasing demand for cloud computing infrastructure.

This is Broadcom's fifth investment in Israel, following its acquisitions of VisionTech for $250 million; Siliquent for $76 million; Octalica for $38 million; and M-Stream for $10 million. Dune Networks and it's 100 employees in Yakum, south of Netanya, is expected to become an additional development center for the semiconductor giant in Israel.

Rami Beracha, a partner in the venture capital fund Pitango, relates that they first met the three entrepreneurs when the company was still based in California in 2001. "We raised seed money that allowed the company to speed forward," he says. "From that initial investment and until 2006, we let the company operate almost independently. In 2006, various acquisition offers started coming in, and we were faced with the dilemma of either to sell the young company or to continue to develop it. We opted to continue its development. Acquisition offers were put forth during this entire period, but the founders were patient. When we received the current offer and saw that the price was right, we decided not to pass it up," he says.