QLogic Corp. acquired 10 Gigabit Ethernet (10 GbE) chip startup NetXen Inc. for $21 million Thursday night in the latest marriage of Fibre Channel (FC) and Ethernet vendors anticipating the convergence of the storage-area network (SAN) and local-area network (LAN).
NetXen makes silicon for 10 GbE network interface cards (NICs) and LAN on motherboard (LOM) chips. The 90-person company will provide QLogic with that piece of the convergence picture to go with iSCSI, Fibre Channel and Fibre Channel over Ethernet (FCoE) for its next generation of converged network adapters (CNAs). IBM Corp. and Hewlett-Packard Co. sell NetXen 10 GbE adapters.
While the acquisition is small from a purchase price standpoint, it's part of a larger developing trend. Fibre Channel switch vendor Brocade paid $2.6 billion for Ethernet switch vendor Foundry Networks Inc. last December, and Ethernet chipmaker Broadcom Corp. is attempting a $764 million hostile takeover of QLogic's closest FC rival Emulex Corp. QLogic has often been mentioned as a possible acquisition target, with Cisco Systems Inc., EMC Corp. and Juniper Networks Inc. considered possible suitors.
"NetXen provides a significant complementary intellectual property and expertise," said H.K. Desai, QLogic's CEO, while discussing the deal on QLogic's earnings call. "NetXen has been highly focused on next-generation Ethernet technology. What we are missing in our product is the offload for the 10 Gig iSCSI target."
Desai said it's crucial for storage networking companies to have their own silicon for Fibre Channel and Ethernet products as convergence approaches. "I think there's going to be some consolidation, and we want to be one of the suppliers," he said. "We believe if you don't have your own silicon you should be out of the business. I look back at iSCSI three years ago, and everybody who didn't have their own silicon did not survive."
Aaron Rakers, managing director at Stifel Nicolaus Equity Research, compared the deal to the proposed Broadcom-Emulex acquisition.
"We believe this looks very similar to our understand of what Broadcom may be looking to do with the FC software/firmware technology via its offering to acquire Emulex and [Broadcom's Converged NICs (C-NICs)," Rakers wrote in a note to clients today. "We will be most notably interested in the development of the 10GbE iSCSI target silicon opportunity going forward, as well as how this market may change QLogic's competitive dynamics over the longer-term."
QLogic's move comes as Emulex's fate remains under a cloud. Emulex turned down Broadcom's initial offer in January, but its board said it would review the offer after Broadcom went public with it last week. Emulex executives refused to comment on the offer or a timeframe for a decision on Emulex's earnings call Monday.
QLogic's financial results were indicative of the economic climate. Its $130.6 million revenue was down 18.3% from last year and 20.2% from the fourth quarter of last year, and at the low end of the vendor's previous forecast.
QLogic CFO and senior vice president Simon Biddiscombe said January was particularly weak for sales. He said February and March were better, but still below normal rates.
"It's clear that the macro-economic slowdown is continuing," he said. "It's also clear that enterprise spending on IT infrastructure is proving slow to recover."