Wall Street’s buzzing over a new way to streamline corporate data networks,and what it could mean for local players QLogic Corp. and Emulex Corp.
Fibre channel over Ethernet promises to combine the speed of special data networks with everyday networks of desktop computers and servers.
The technology, which industry watchers see taking hold around 2012, has the potential to simplify data centers and cut server, wiring and other costs for businesses.
Aliso Viejo’s QLogic and Costa Mesa’s Emulex, two rivals that make electronics for data storage networks, are competing to develop the technology and be first to market it.
There’s chatter among analysts about why the technology makes QLogic and Emulex acquisition targets for big networking players such as Cisco Systems Inc. and Brocade Communications Systems Inc.
“As the networks converge, we believe fibre channel and Ethernet providers may merge at some point,” said Kaushik Roy, an analyst with San Francisco’s Pacific Growth Equities LLC. “We would not be surprised if Emulex and QLogic are acquired by Brocade and Cisco.”
A handful of other companies are working on developing fibre channel over Ethernet chips, switches, software and adapter cards, including Irvine’s Broadcom Corp., EMC Corp., IBM Corp., Intel Corp. and Sun Microsystems Inc.
Roy said he expects to see acquisitions as “Ethernet vendors are looking for fibre channel technology and fibre channel vendors are looking for Ethernet technology,” he said. “Sometimes it’s easier, faster or cheaper to just buy technology rather than build it.”
The background: QLogic and Emulex make circuit boards that speed the flow of information among computers on a data storage network. The boards are designed to the fibre channel standard, the basis for networks of data storage computers.
As it is now, corporations, banks, retailers and others run data storage networks separately from Ethernet networks,the most common form of network used to link desktop PCs to servers and the Internet.
A server acts as an intermediary, allowing Ethernet network users to tap the hoards of transaction, inventory and other data stored on fibre channel-based networks.
With fibre channel over Ethernet, data managers could cut down on circuit boards and wires used to bridge differing networks.
For Cisco, the king of Ethernet networks, an acquisition could be the easiest way to offer fibre channel over Ethernet. The company already owns 80% of San Jose startup Nuova Systems Inc., which acts as Cisco’s development arm for fibre channel over Ethernet.
Cisco is likely to buy all of Nuova if it proves fruitful, according to industry insiders.
“The Ethernet guys want to play too,” said Jeff Benck, QLogic’s former president and chief operating officer who resigned from the company late last week, after being interviewed for this story.
Some analysts also speculate Cisco could look at buying QLogic. Benck doesn’t dismiss the chatter.
“The storage networking stack is very complex and hard to replicate,” he said. “We believe that the storage networking guys have an advantage over the pure Ethernet players.”
Other companies that could look to buy their way into fibre channel over Ethernet include QLogic rival Brocade or IBM and Hewlett-Packard Co.
Slumping share prices for QLogic, Emulex and other tech companies are adding to the speculation.
QLogic, which had a recent market value of about $2 billion, has seen its shares fall by roughly 10% in the past 12 months.
Emulex’s shares are off some 15% on a recent market value of about $1.3 billion.
QLogic has close ties with Cisco.
“We’ve been working with Cisco and Nuova for several years,” Benck said.
Cisco’s chief financial officer, Frank Calderoni, was QLogic’s chief financial officer back in 2004.
San Jose-based Cisco also licenses some fibre channel technology from QLogic for its switches and has resold QLogic’s switches, according to Benck.
Emulex could be a potential acquisition target, too, but for San Jose’s Brocade.
Brocade might need an acquisition to “create a footprint in the server network market,” Pacific Crest’s Roy said. “It makes sense probably for Brocade to buy Emulex.”
“We’ve known the Brocade guys for a long time,” said Mike Rockenbach, Emulex’s chief financial officer. “It’s an important part of providing our solutions that we interact with the big switch players out there.”
Rockenbach said he understands the chatter: “We have a very good position in terms of where we are at in the data center and from a technology standpoint. There’s always the potential that somebody would look at us or one of our competitors and think we are a good acquisition.”
An Emulex or QLogic deal could be a ways out, if at all.
For one, fibre channel over Ethernet still is in the testing phase and tech standards bodies haven’t yet given it the green light.
Competitive concerns are a factor.
An acquisition of QLogic by Cisco could muddy things with customers of both companies, such as HP and IBM.
“There could be a concern that our customers might have with Cisco,” QLogic’s Benck said.
A Brocade buy of Emulex also could raise eyebrows.
“If Brocade were to buy us, it changes our ability to really cooperate with a competitor to go after the broader market,” Emulex’s Rockenbach said. “It can have a negative impact.”
