Back in 1994, Costa Mesa-based Emulex Corp. spun off QLogic Corp., which has gone on to surpass its former parent in market capitalization and even rival it in some markets. Now Emulex appears to be following in some of the footsteps of its offspring.
Last year, QLogic left the Costa Mesa office park that’s home to Emulex for the Summit Office Campus in Aliso Viejo, purchasing its 165,000-square-foot headquarters earlier this year. Now Emulex is about to start searching for a new headquarters, too.
In August, QLogic completed its $1.7 billion acquisition of Ancor Communications Inc. Now Emulex is hinting that it might also be acquiring some companies soon.
“There are companies that we can buy that have niche positions in various technologies,” said Michael Smith, vice president of marketing for Emulex. “There are more opportunities than we have the money to go after, but there are enough to position us very well as the market evolves.”
But Emulex’s buying power took a blow on Wall Street early last week when shares in the company dove nearly a third to around 120. The drop came after the company’s second-largest shareholder, Massachusetts Financial Services Co., said it planned to reduce its stake in the company to 6.5%, down from about 10%. By midweek, Emulex shares were trading up again but still off their recent high.
Meanwhile, QLogic executives aren’t exactly sitting on their hands.
“You don’t want to do too many back-to-back $1.7 billion purchases,” said Larry Fortmuller, vice president of marketing for QLogic. “We’re not Cisco. But we are certainly looking. There are things going on in the industry.”
When QLogic was spun-off from Emulex, the two companies pursued different markets: Emulex focused on networking equipment, while QLogic targeted components for storage devices such as disk and tape drives. But nowadays, as storage and networking converge, they are in the same markets for certain products. They compete head on in speedy fibre channel host adapters, which are circuit boards used to connect computers to components.
As former siblings and current rivals, the two companies eye each other’s decisions and move in parallel paths.
QLogic earlier this year paid $33 million to buy its facilities in Aliso Viejo. Emulex’s lease on its Costa Mesa headquarters will expire in August, and its officials are looking for new facilities.
“Our building is getting maxed out,” Smith said. “We’re breaking down walls and putting in cubes in conference rooms and doing all types of unnatural acts. We should survive until next August but after that, no way.”
Smith said Emulex is looking for a modern building that makes the company appear like a technology mover and shaker and that in turn will help attract customers and employees.
QLogic used to be next door to Emulex in Costa Mesa. But don’t expect Emulex to move to Aliso Viejo,its executives said they are aiming to stay around John Wayne Airport because it’s more convenient for employees.
There are other subtle differences. While QLogic made a big acquisition with Minnetonka, Minn.-based Ancor, Emulex has yet to make a large purchase. Smith said Emulex Chief Executive Paul Folino is conservative in his expansion strategy but plans to tap Emulex’s market capitalization as currency for deals. Last week, Emulex’s market value was about $4.5 billion.
“He recognizes that there is a time and place to do this,” Smith said. “We’ve been looking and continue to look for attractive investments to make.”
One indication of Emulex’s intent came nine months ago when it hired one of its former consultants, Karen Mulvany, as vice president for business planning and development.
“Her pure focus is what do we do with our market cap and our cash,” Smith said. “What a job.”
Another indicator is that Emulex executives are watching the style of another aggressive company, Irvine-based Broadcom Corp.
“Broadcom is a 7-year-old company, but it’s only been in the past two years that it’s gone out and started acquiring,” Smith said. “They had about three or four years of successful profitability before they did that. Emulex has about two and a half years of profitability under our belts.”
Executives from both Emulex and QLogic say their rivalry is friendly. But the competition does have an edge to it. Emulex’s Smith questioned why QLogic would buy Ancor Communications, a deal some investors also balked at.
“It’s a tough play because they picked the No. 3 player,” he said. “Now you’ve got execution problems and how to win market share from a much larger set of competitors. That’s a tough set of problems to deal with. I don’t know if Emulex is interested in signing up for those kinds of deals. We have other interesting opportunities out there.”
QLogic’s Fortmuller agreed that Ancor is not No. 1 in its segment and noted that the dominant player, San Jose-based Brocade Communications Systems Inc., has about 70% of the fibre channel switch market.
“But as the market goes up, no one hangs onto a 70% market share, except Microsoft,” Fortmuller said. “We think that in a rising tide, there’s an opportunity for all companies to make money. Brocade’s market cap (of $20 billion last week) reflects the excitement that Wall Street has for this business. I’d rather be in the business that everyone is excited about.”
And then, Fortmuller added a subtle shot at Emulex: “It astounds me that a company wouldn’t want to be in the switch business.”
Since the spin-off, QLogic has grown much faster than Emulex. It now has 560 employees (including 100-plus from Ancor), compared with Emulex’s 175.
Both companies have posted similar skyrocketing results. Emulex reported its revenue expanded 92% to $55.5 million for the quarter ended Sept. 30, and earnings almost doubled to $12.8 million. QLogic said revenue for its second quarter ended Sept. 26 rose 72% to $47.5 million while net income grew 155% to $13.4 million.
QLogic has $115.6 million in cash and short-term investments while Emulex has $162.8 million in cash and investments on hand, according to their latest quarterly reports.
With a market cap of $9.5 billion last week, investors have placed a higher value on what QLogic is doing.
Still, differences between the two companies’ core products are difficult to discern. As Fortmuller noted, “You have to look under the hood.”
At the recent Comdex trade show in Las Vegas, both Emulex and QLogic showed off their new 2-gigabit host adapters and got in a little sparring.
“Today, we’re No. 1 in the industry by a long shot. We sell more adapters than our competitors combined,” said Emulex’s Smith. “We’re the No. 1 provider to Compaq, EMC and IBM. Our partnerships are the who’s who list of leading storage and service providers. We have 41% of the non-captive market. QLogic has half that.”
“The difference with Emulex is that they announced a product,” said Laura Raybin, director of marketing for QLogic. “We just didn’t announce a card. We announced a strategy.”
There is one thing that both sides agree upon. Emulex is considered the more conservative. But Smith said to keep an eye on his firm.
“You should expect to see from us a lot of growth,” he said. “We’ve got the customer base. We’ve got the shipments. We’ve proven ourselves. The fibre channel market really is here and will remain strong. I think you’ll start to see in the next three to 12 months some pretty interesting investments that we’ll be making.” n
