Storage insiders predicted the Oracle-Sun deal would kick off a series of acquisitions, and now today chipmaker Broadcom is making a move on HBA vendor Emulex. Broadcom’s unsolicited offer of approximately $9.25 a share or $764 million is about a 40% premium over Emulex’s closing price of $6.61 yesterday.
Broadcom has actually been after Emulex for a while. When Emulex adopted a poison pill in January to defend it from unwanted suitors, Broadcom was the unwanted suitor it had in mind. A letter that Broadcom Scott McGregor sent to Emulex’s chairman Paul Folino and its directors today revisited that acquisition attempt:
“We were disappointed when, in early January, you responded that the company was not for sale and abruptly cut off the possibility of further discussions. Even more troubling was the fact that merely one week after that communication, you took actions clearly designed to thwart the ability of your shareholders to receive a premium for their shares. … It is difficult for us to understand why Emulex’s Board of Directors has not been open to consideration of a combination of our respective companies. We would much prefer to have engaged in mutual and constructive discussions with you. However this opportunity is in our view so compelling we now feel we must share our proposal publicly with your shareholders.”
McGregor went on in the letter to lay out Broadcom’s vision for single-chip converged network devices delivering Fibre Channel and Fibre Channel over Ethernet. He also laid out a case why it would benefit Emulex to accept the offer:
“Customers will demand from their suppliers advanced chip technology and supply chain scale and reliability which is not an area of strength for Emulex. Broadcom brings tremendous value in advanced chip technology and supply chain scale and reliability to Emulex’s products—and customers.”
McGregor’s letter also stated that Broadcom is taking legal action to declare Emulex’s poison pill invalid.
Broadcom has tried to make inroads in storage before. It has sold chips for FC switches and a few years ago developed a converged network interface (C-NIC) that including a TCP/IP offload engine (TOE), iSCSI HBA and remote memory access (RDMA) technology onto one chip – a forerunner of the current FCoE CNAs without the Fibre Channel. However, Broadcom hasn’t been successful in storage and today’s earnings report – it lost $92 million last quarter — show it hasn’t been successful period lately.
The approach of FCoE could prompt more Ethernet companies to look for FC technology, the reverse of Brocade’s acquisition of Ethernet provider Foundry late last year.
“Broadcom doesn’t want to buy Emulex for its embedded switch business, it wants its Fibre Channel stack,” Wedbush Morgan research analyst Kaushik Roy says. “To compete, you’ll need a Fibre Channel stack. And if Juniper has half a brain they will buy QLogic, although Juniper’s never known for doing a lot of acquisitions.”
Roy says Emulex may use its poison pill to negotiate an even better deal, but he said the time could be right to sell. For years, Emulex and QLogic have had a duopoly for HBAs but there will be greater competition as FCoE takes hold.
“There are a lot of players getting into FCoE, Emulex’s revenues and margins will be under pressure,” Roy said.
In a note to clients today, Stifel Nicolaus Equity Research analyst Aaron Rakers indicated that Emulex has fallen behind QLogic in developing FCoE technology. “We believe [Emulex] would face some strategic and fundamental challenges going forward with regard to its positioning in blade servers, our belief that QLogic is better positioned in FCoE, and continued secular headwinds in its Embedded Storage Product (ESP) division,” Rakers wrote.