Like all love triangles, Broadcom Corp.’s bid for Emulex Corp. likely will create drama for QLogic Corp.
Last month, Irvine’s Broadcom went public with a $764 million hostile bid for Costa Mesa-based Emulex, QLogic’s longtime rival.
A Broadcom buy would shake up a longstanding local rivalry between Aliso Viejo’s QLogic and Emulex, both makers of electronics for data storage networks.
The pair,which enjoys a duopoly for a profitable bit of electronics called host bus adapters,has deep ties.
QLogic spun off from Emulex in 1994 with the two maintaining a mostly cordial, but sometimes strained, competitive relationship.
If Broadcom buys Emulex, QLogic would have a formidable new foe.
“Over time that would be bad for QLogic,” FBR Capital Markets & Co. analyst Craig Berger said. “They don’t have as much scale as Broadcom or the intellectual property portfolio to go as far.”
The two companies are engineering heavyweights. But Broadcom has bigger cash reserves to throw into research, development and acquisitions.
Broadcom also has a highly diverse business making chips for servers, desktop computers, consumer electronics, networking gear and wireless phones. QLogic is more focused with just a handful of products for data storage networks.
Technology Battle
Emulex and QLogic have a lock on the market for host bus adapters,circuit boards with chips that link data storage computers to servers on a network.
Together, the two have roughly 80% of the market.
QLogic holds the lead, with about a 55% share at latest tally. It’s led the market for the past year or so.
A Broadcom buyout would shake up the longtime market dominance.
The competitive landscape for Emulex and QLogic is further shifting with an up-and-coming technology that promises to bridge faster, specialized data networks with cheaper, everyday networks of servers and desktop computers.
Both companies are angling for early design wins for the technology, known as fibre channel over Ethernet. The technology is expected to start taking hold in the next few years.
An Emulex buy would build on Broad-com’s business making chips for servers, routers and other networking gear, where profits are better than in consumer electronics.
Broadcom’s bid suggests that fibre channel over Ethernet is the way of the future and justifies the years of development put in by QLogic and Emulex, according to analysts.
“It validates the fact that vendors are now racing toward developing next generation fibre channel over Ethernet technology,” said Kaushik Roy, senior analyst of data storage technologies at Wedbush Morgan Securities Inc. in San Francisco.
In addition to QLogic and Emulex, players include Cisco Systems Inc., Brocade Communications Systems Inc. and LSI Corp.
Broadcom’s bid for Emulex makes QLogic a potential takeover target in the eyes of networking players looking to gain expertise in fibre channel.
Last week, QLogic’s shares jumped on chatter about EMC Corp. being interested.
QLogic’s shares are up roughly 13% since Broadcom announced its intentions for Emulex. It had a market value of about $1.6 billion last week.
QLogic could command, at a minimum, a 40% higher offer of about $2.5 billion, according to a report in The Register, an online tech-focused trade publication in Britain.
A possible QLogic suitor is Juniper Networks Inc., a maker of Ethernet switches that doesn’t have any fibre channel technology in its lineup, Roy said.
Juniper makes sense because it’s already partnering with QLogic to develop fibre channel over Ethernet technology.
“Unless Juniper buys QLogic, it risks falling behind Brocade in the converged switching market,” he said.
Broadcom Chief Executive Scott McGregor declined to specifically say whether his company looked at buying QLogic.
“We certainly looked at other opportunities, but our focus was on Emulex,” McGregor said. “We believe that’s where they are with their product cycle was the best fit for us. Our focus is on closing the deal with Emulex.”
