Emulex Corp., a maker of electronics for data storage networks, last week agreed to buy a Broadcom Corp. offshoot that’s critical to Emulex’s strategy.
The Costa Mesa company is set to acquire Sunnyvale-based ServerEngines Corp. for about $159 million in cash and stock.
Under the terms of the deal, expected to close next month, Emulex could tack on another 4 million shares, or about $40 million, if ServerEngines meets business goals.
The two companies have close ties.
Emulex worked with ServerEngines a few years ago to break into a market known as converged networking.
Emulex’s converged network adapters—circuit boards with chips that bring the speed of specialized data networks to everyday networks of servers and desktop computers—contain ServerEngines’ Ethernet chips.
Converged networking is seen as the biggest development in corporate networks in years.
“Over the past two years, our partnership model with ServerEngines has been an extremely effective strategy to establish Emulex in both the 10-gigabit Ethernet and converged networking markets,” Chief Executive Jim McCluney said.
According to one analyst, the deal couldn’t have come sooner since Emulex is so dependent on ServerEngines’ Ethernet chips.
“The acquisition addresses what was perhaps the biggest risk associated with Emulex,” said Kaushik Roy, a Wedbush Securities Inc. analyst in San Francisco. “The company was dependent on ServerEngines for the 10-gigabit Ethernet technology. Hence an acquisition of ServerEngines by any other vendor could have led to significant disruption in Emulex’s strategy, potentially compromising its ability to be a player in the converged data center market.”
The deal came at a hefty price, Roy said.
“This is very pricey in our opinion, but we believe that Emulex was not in a strong position to bargain,” he said.
It’s not the first time Emulex has paid big to acquire a company.
At the tail end of the tech boom in 2000, Emulex paid $645 million to buy Concord, Mass.-based Giganet Inc. At the time of the deal, Giganet had less than $1 million in revenue.
Emulex’s top rival, Aliso Viejo-based QLogic Corp. made a similar Ethernet technology buy in 2009, when it nabbed Northern California’s NetXen Inc. for $21 million.
ServerEngines has about 170 workers, primarily engineers, in Silicon Valley, Texas and India.
McCluney said the deal would add roughly $12 million to Emulex’s revenue starting next year.
Initially, Emulex’s earnings are set to take a hit on acquisition costs.
For the current quarter, the company said it’s now expecting profits of $12 million to $14 million, a range that’s on the low end of analysts’ average expectation of $14 million.
Emulex expects to report sales of $100 million to $103 million, which at the high end would fall in line with expectations.
Analyst Roy has an “underperform” rating on Emulex’s shares and recently slashed his price target on the stock to $11 per share, down from an estimate of $14 per share.
Emulex was trading at about $10 per share late last week on a market value of roughly $800 million.
“Although it appears that the fundamentals are improving for Emulex, we will wait for some concrete data points before we turn optimistic on the stock,” he said in a research note.
ServerEngines History
ServerEngines was founded in 2004 by former Broadcom engineers who came to the chipmaker when it bought Silicon Valley’s ServerWorks for $1.8 billion in 2001.
ServerWorks is Broadcom’s unit for network chips that go after converged networks.
ServerWorks founder Raju Vegesna parted ways with Broadcom in 2003 over what the company called “operational issues and the strategic direction.”
In 2004, Vegesna and the other founders of ServerWorks—Sujith Arramreddy, technology chief, and Sai Gadiraju, head of engineering—founded ServerEngines and funded the company themselves.
About a year ago, Emulex talked up its relationship with ServerEngines amid a protracted, hostile takeover bid by Irvine-based Broadcom.
Some analysts, at the time, viewed Emulex’s decision to go with ServerEngines over Broadcom’s ServerWorks as a key impetus for the takeover attempt.
Converged networking is what attracted Broadcom to Emulex.
In late 2008, Broadcom quietly offered $764 million for Emulex then went public with its offer in early 2009.
Emulex rejected the offer several times, prompting Broadcom last June to up its ante to $912 million, which also was rejected. Broadcom dropped its bid a month later.
The takeover drama pitted some of the county’s most high-profile executives against each other and saw the companies trading barbs, lawsuits and, occasionally, personal attacks.
