QLogic Corp.’s $209 million deal last week to acquire key Ethernet assets and licenses and engineers from Irvine-based chipmaker Broadcom Corp. provides a much clearer path for product development in a segment expected to have strong growth in the coming years.
The Aliso Viejo-based networking equipment maker will acquire certain 10-, 40- and 100-gigabit controllers and related technology as part of the deal. It also will bring 170 Broadcom engineers who specialize in the technology at sites scattered around the world.
An Ethernet controller is a small chip used to handle data transfer between two computers.
The deal, which took the industry by surprise, will put QLogic on par with Costa Mesa-based rival Emulex Corp. in the No. 2 spot for market share.
“Our Ethernet portfolio was not as strong,” said Vikram Karvat, QLogic’s vice president of marketing. “This brings a very strong data networking product portfolio into the mix.”
Broadcom had a 15.4% share of port sales in 2013, compared with 3.4% for Qlogic, according to Redwood City-based researcher Dell’Oro Group Inc. Emulex had 18.3%.
Santa Clara-based Intel Corp., the world’s largest chipmaker, is the market leader, with a 40.5% share.
QLogic’s deal with Broadcom, expected to close by April, hasn’t won over Wall Street, as QLogic’s product road map continues to face scrutiny.
“We do have some concerns,” Andrew Nowinski, a senior research analyst at Minneapolis-based Piper Jaffray Cos., said in a note to investors. “The acquisition could create customer confusion, given the uncertainty of the company’s roadmap. Additionally, we believe the all-in cost of $209 million (45% of total cash) was a steep price to pay.”
Product Road Map
QLogic wouldn’t discuss its product road map in the Ethernet market.
“It’s a bit premature to talk about specific product introductions” until after the deal closes, Karvat said.
The company makes switches, adapter cards and other electronics used for data storage and server networks.
The buy’s long-term benefits, however, should serve as a “lifeline” for company growth, as networks move to all-Ethernet, according to Nowinski.
The Ethernet segment is forecast to grow at a 29% compound annual rate through 2016 to $1.24 billion in sales, fueled by machine-to-machine connectivity, data centers and cloud computing.
Dell’Oro director Sameh Boujelbene views the deal more favorably because QLogic gained entry to cloud computing customers it lacked before the buy.
“Broadcom has lined the floor for QLogic with a set of design wins,” she said. “It is a very smart move for QLogic. I don’t think this type of opportunity comes around quite often.”
The deal also calls for Broadcom to become a long-term supplier to QLogic for what’s known as ASIC chips, or application-specific integrated circuits, which are customized for specific uses.
QLogic is expected to license Broadcom patents to support its ongoing fibre-channel product lineup for a one-time fee of $62 million. The maturing fibre-channel segment accounted for the bulk of QLogic’s $484.5 million in sales in the 12 months through March, the end of its fiscal year.
Sales fell 13.2% from the prior year.
The deal is the first under Chief Executive Prasad Rampalli, who took over the top post Feb. 3 in place of interim chief executive Jean Hu.
Hu in May replaced Simon Biddiscombe, who abruptly resigned. She returned full-time to her role as senior vice president and chief financial officer after Rampalli was hired.
Wall Street largely shrugged off the news on Broadcom’s side of the deal.
Deutsche Bank Equity Research said the sale reflects the chipmaker’s willingness to exit or trim noncore business lines but “does not move the needle very much,” research analyst Ross Seymore wrote in a note to investors.
Broadcom has been a longtime leader in connectivity chips that power Wi-Fi, Bluetooth, GPS and other applications.
It said it expects the deal to “slightly” boost earnings this year. QLogic projects a more immediate bump in profits.
