At this rate of spending, Analytico believes that Emulex may be in the unintentional process of creating its own unique financial Armageddon. In our opinion, the company may be creating an environment that will eventually lead to an internal collapse of its core operating model and the company very well could begin to implode from within.
Let's call it like it is: the acquisition of ServerEngines is not a marriage. It's the equivalent of a complete and utter abandonment of cash into the black hole of time that may come back to cripple Emulex's business model. It is still my opinion that shareholders should have taken the comparatively rich Broadcom offer. It is clear that Emulex has failed to increase its valuation since that once lucrative offer expired one year ago.
Can the acquisition of ServerEngines be a new beginning for Emulex? I believe it could very well have been a new beginning for the company if they would have executed on the acquisition long ago. Dark times very well may be ahead for Emulex and their "UCNAs," given the jump that Brocade and QLogic have on them with the development, release and design wins under their respective belts at this time. While its competitors will be focused on executing even faster in the converged networking space in 2010, Emulex will be tied up with product, IT and personnel integration issues. Which leads me to wonder if Emulex will put its own lineup of ASICs on the deceased list now that it owns the ServerEngines ASICs?
At a time when companies should be hoarding cash and strengthening their balance sheets, Emulex is starting to bloat with more and more employees and considerably less cash then it had just two weeks ago. Emulex's CEO Jim McCluney was recently quoted as saying, "ServerEngines gave Emulex a fast path to combining Ethernet with its own Fibre Channel stack, and now that the UCNAs are coming to market it makes sense to bring the technology in-house. That gives Emulex more control of the technology." The problem here is that the technology should have been brought in-house long ago, and now the competition has leapfrogged out ahead of Emulex.
Given the competitive state of the FCoE market overall, it's hard to see how this translates into a new beginning for Emulex. Let's take another look at this acquisition a few quarters from now and access just how strategic, and smart, it was this late in the game.
