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Emulex buys ServerEngines

Big money for small storage company

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Emulex is buying ServerEngines, thus securing its core FCoE technology.

FCoE is Fibre Channel over Ethernet, the sending of Fibre Channel data frames across an Ethernet link. There are two dominant Fibre Channel Host Bus Adapter (HBA) companies: Emulex and QLogic. Both are moving energetically into FCoE and QLogic has an advantage as it owns its own Ethernet intellectual property (IP), whereas Emulex has sourced its Ethernet IP from ServerEngines.

FCoE cards are called Converged Network Adapters (CNA) and are becoming single chip devices with the Ethernet IP at the core of the chips.

ServerEngines Corporation is a privately-held, fabless semiconductor company founded in 2004 and headquartered in Sunnyvale, California. It has approximately 170 employees, mostly engineers, based in Sunnyvale, as well as Austin, Texas and Hyderabad, India.

There are two product lines. The first is the BladeEngine family of 10Gbit/s Ethernet application-specific integrated circuits (ASICs) designed for Local Area Network on Motherboard (LOM) applications. Emulex uses this ASIC for its OneConnect CNA. Second is the Pilot family of server management controllers, which reside down on the motherboard and enable remote IP based “lights out” management capabilities. Pilot ASICs are currently being used by Cisco, HP, NEC and Unisys.

Emulex is paying big bucks for this small company: around $78m in cash plus eight million shares of Emulex stock, which would represent an additional $81m. The agreement also provides for the payment of an additional four million shares of Emulex stock, issuable if the ServerEngines business achieves certain milestones targeted for completion by the end of 2011. Emulex will also assume the outstanding ServerEngines debt, including debt owed to Emulex, which is currently $25m, other liabilities, and ServerEngines stock options upon close.

These numbers add up to about $225m, if the ServerEngines achieves the specified milestones, possibly more depending upon the unspecified debts and stock options.

ServerEngines describes its founding thus: "ServerEngines is very much a restart of ServerWorks; a maker of Intel-based server chipsets that was started in the mid-1990's and was subsequently sold to Broadcom in 2001. In 2003, ServerWorks CEO Raju Vegesna, left Broadcom and began deciding what his next company would be. In early 2004, Raju and the other two founders of ServerWorks, Sujith Arramreddy, CTO, and Sai Gadiraju, VP of Engineering, founded ServerEngines and funded the company themselves."

There was a $2.2m equity funding round in March. That $25m debt suggests Emulex has been funding ServerEngines. So it looks on the face of it as if the ServerEngines founders and shareholders will share about $200m between them. Not bad at all for six years' work.

Both the Emulex and ServerEngines boards have unanimously approved the acquisition and it is expected to be completed in July 2010, subject to receipt of ServerEngines stockholder approval and satisfaction of other closing conditions.

Jim McCluney, Emulex’s President and CEO, said: “The combination of ServerEngines’ Ethernet and Internet Small Computer System Interface (iSCSI) expertise with our own data centre technologies and world-class engineering team in an acquisition provides a significant opportunity to solidify Emulex’s Ethernet-driven network convergence strategy for 2011 and beyond.” With ServerEngines on board Emulex will control its own CNA destiny.

McCluney added this: "We believe that the addition of LOMs and Pilot Server Management Controllers from the acquisition will broaden our strategic position as a key infrastructure provider to server OEMs by providing a single and simplified interface for customers to engage on future development, support and communications as converged networks move out of the labs and into production environments over the next year. We also expect the acquisition will provide a more cost effective model in the 10Gbit/s Ethernet LOM and UCNA markets, as well as enabling us to more effectively address opportunities in the target storage market, as our volumes increase in 2011.”

This is good news for Emulex. It has notched up a raft of design wins for its CNAs, with Dell, EMC, Hitachi Data Systems, HP, IBM and NetApp all on board. QLogic has a real fight on its hands because Emulex will no longer be slowed down by having to be dependent on an independent ServerEngines with its own agenda for core technology developments.

Now Emulex's eyes will turn to FCoE adoption as lossless and low-latency Data Centre Class Ethernet rolls out next year. With this acquisition there's around a quarter of a billion Emulex acquisition dollars riding upon the FCoE adoption stakes. It had better be popular. ®

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