Cavium, QLogic $1B deal expands data centre chips

Article By : Rick Merritt

The acquisition adds Qlogic's Fibre Channel and Ethernet controllers and boards to Cavium's line up of communications, security and general-purpose processors, positioning Cavium as more of a full-line supplier to data centres.

In a billion-dollar acquisition of Qlogic, Cavium is now set to take on storage and networking with Broadcom, Intel and Mellanox. The deal teams one of the semiconductor’s fastest growing companies with one just starting to emerge from a decline.

The acquisition adds Qlogic’s Fibre Channel and Ethernet controllers and boards to Cavium’s line up of communications, security and general-purpose processors, positioning Cavium as more of a full-line supplier to data centres. The deal also gives Cavium a mature software stack in storage and networking and operational savings expected to amount to $45 million a year by the end of 2017.

Both companies sell to server makers and large data centers with a customer overlap of more than 60%. Qlogic’s customer base is highly concentrated with nearly 60% of its business for the last several years to three top server makers — HP, Dell and IBM.

__Figure 1:__ *Cavium and Qlogic share more than 60% of their customers in common. (Image: Cavium)*

Cavium will pay approximately $15.50 per share for Qlogic, $11 per share in cash and the rest in stock. Cavium will take on $750 million in debt to pay for the deal. The boards of both companies have approved the deal.

“In our view, this deal is all about company scale,” said Bob Wheeler, principal networking analyst at market watcher The Linley Group (Mountain View, Calif.). “It essentially doubles Cavium’s revenue and eliminates the redundancies of operating two public companies, [but] there is little overlap in products and customers, so there’s not much room for reducing R&D and other costs,” Wheeler said.

One financial analyst lowered Cavium from a buy to a hold rating, seeing Qlogic as a drag on Cavium’s earnings.

"While we believe this acquisition could prove technologically prudent long term and adds important new elements to Cavium's product portfolio, the deal brings with it a stark shift in anticipated strategy given Cavium is just ahead of several new product ramps and potentially lowers the long-term growth rate of the company creating a disconnect with Cavium's premium valuation," said Matthew Ramsay of Canaccord.

Qlogic rebounded slightly in its last fiscal year ending in May after reporting sagging results for several years. Annual revenues fell from $558 million in 2011 to a low of $460 million in 2014, then stepping up to $520 million last year. Profits tumbled from $140 million in 2011 to a loss of 18 million in 2014, recovering to a $50 million profit last year.

Cavium said Qlogic has 782 employees today. However, it reported 927 employees in its annual report in May. Cavium expects to add $400 million a year to its top line from the deal, suggesting it may cut Qlogic’s systems-level business in Fiber Channel switches.

“There’s a lot of cross pollination of IP and new products in storage and server that combine the two companies’ IPs,” said Cavium’s chief executive, Syed B. Ali in a call with financial analysts.

“The [Qlogic storage and networking] software is as, if not more important because it runs on all major operating systems and the major versions of them — this is a huge task,” Ali said. “It would have taken us 5-7 years to have a mature stack, but this will now be available on Cavium products,” he added.

Cavium aims to pump Qlogic’s business, now growing at 8%, to 10% growth with the overall company targeting growth well into double digits. “This will be among the highest growing semiconductor companies in the world,” Ali said.

Depending on the area, it will take six to 12 months for Cavium to start winning new sockets based on synergies between the companies. Qlogic has more than $300 in cash on hand and will expand Cavium’s cash flow, funds that will be used in part to help pay down debt.

“The scale of operations of a nearly $1 billion revenue business will allow the combined company to deliver better solutions for customers and create more career opportunities for employees,” said Christine King, executive chairman of QLogic, speaking in a press statement.

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