Computer
Network gear makers QLogic Corp. and Emulex Corp. would be among suppliers with fewer places to sell their products, channeling pricing power to buyers, said Peter Falvey, managing director of investment bank Revolution Partners LLC. IBM is in talks to buy computer-server maker Sun, people with knowledge of the matter have said.
QLogic, Emulex and Mellanox Technologies Ltd., which makes products that help servers communicate, have a combined market value of less than $3 billion and their annual sales are equal to about 1 percent of IBMs. They get about half their revenue from IBM, Hewlett-Packard Co., Dell Inc. and Sun, according to data compiled by business relationship Web site Connexiti.com.
“The real threat is its a 1 plus 1 equals 1.7 situation,” Boston-based Falvey said in an interview. “Im sure those guys are nervous.”
Emulex gets about 35 percent of its revenue from IBM and Sun, compared with 27 percent for QLogic and 23 percent for Mellanox, according to Connexiti. A combined company would have the scale to press suppliers for lower prices, potentially reducing the value of sales, Falvey said.
IBMs Dominance
The deal would give IBM, the largest maker of server computers, almost half of global server sales, and may spark a wave of acquisitions that could pressure suppliers further. That, coupled with the recession, has weighed on cash flow and available credit at those smaller suppliers, which may in turn push them to combine to stay afloat, Deloitte LLP Vice Chairman Eric Openshaw said.
“If you have a big cash war chest, you can ride this thing out,” said Openshaw, who leads the consultants technology group. “If you dont, youre probably looking to see who your most logical partner is.”
IBM, based in Armonk, New York, would pay about $10 for each share of Sun, according to the people familiar with the matter. Server computers run networks and Web sites.
Dell, the second-largest personal computer maker, and EMC Corp., the worlds biggest maker of storage computers, may be next in line to be sold, Revolutions Falvey said. Round Rock, Texas-based Dell has cut jobs to help reduce $4 billion in expenses as it deals with a recession thats predicted to cut PC shipments by the most ever this year, while EMC is one of the few, mid-sized companies left to target, he said.
Stock Performance
Emulex gained 32 cents, or 6 percent, to $5.68 yesterday in New York Stock Exchange composite trading. QLogic rose 43 cents, or 3.7 percent, to $12.11 on the Nasdaq Stock Market. Sunnyvale, California-based Mellanox advanced 28 cents, or 3.2 percent, to $9.12.
Businesses accustomed to using one type of technology, like the network gear that QLogic and Emulex make, are probably going to be unwilling to part with their equipment, said Ghai, who rates QLogic shares “accumulate” and doesnt own any.
Executives at QLogic and Emulex contend that consolidation wont hurt their business. Aliso Viejo, California-based QLogic supplies chips and switches for corporate networks. Emulex, based in Costa Mesa, California, makes components that help computers store data.
Emulex Stance
“The rumored IBM-Sun deal could have a positive impact on our storage and data networking business” by increasing sales of some products, said Scott Genereux, QLogics senior vice president of worldwide sales and marketing. He touted the companys more than 10-year relationship with IBM and said theres a “strong preference” for QLogics products in Suns user base, which may help increase sales of products that let computers work with other devices.
“Were embracing it,” Emulex Chief Operating Officer Jeff Benck said in an e-mail. “It provides us with stronger customers.” Spokeswoman Katherine Lane declined to elaborate further.
Mellanox spokesman Brian Sparks declined to comment because the IBM-Sun talks havent been officially disclosed. IBM spokesman Ian Colley declined to comment on the companys relationships with suppliers. Sun declined to comment on a possible deal with IBM, spokesman Shawn Dainas said. Representatives at Dell and Hopkinton, Massachusetts-based EMC also declined to comment.
Palmisanos Goal