AMCC Buys More Storage

Applied Micro Circuits Corp. (AMCC) (Nasdaq: AMCC) deepened its commitment to storage today to the tune of more than $150 million by purchasing Serial ATA controller startup 3ware Inc.

The boards of directors for both companies approved the acquisition for $150 million in cash plus stock options based on an exchange ratio to be determined at closing. AMCC executives say they expect the deal to close April 1 (see AMCC Acquires 3Ware).

Like other telecom-chip makers, including PMC-Sierra Inc. (Nasdaq: PMCS), Vitesse Semiconductor Corp. (Nasdaq: VTSS), and Broadcom Corp. (Nasdaq: BRCM), AMCC entered the storage sector looking to make up for sagging telecom revenues (see PMC Still Likes Storage, Chip Trio Faces Post-Bubble Blues, and Broadcom Raids SATA Startup).

San Diego-based AMCC took its first plunge last October, purchasing Fibre Channel host bus adapter (HBA) startup JNI for $213.7 million (see AMCC Looks to Buy JNI). Now that AMCC has HBAs, SATA controllers, and storage chips, can a full-blown SAN system be far behind?

Since we acquired JNI, we have been very vocal about our desire to expand our storage business into complementary areas,” AMCC CEO Dave Rickey said on a conference call to announce the 3ware deal.Rickey said 3ware met all the criteria AMCC set for acquisitions: It is in a high-growth market (SATA); it has strong growth margin expectations; it generates revenue; it's close to profitability; and it fits with AMCC’s integrated chip business.

Rickey said 3ware’s 70 employees will stay on at its Sunnyvale, Calif., headquarters and become part of AMCC’s global SAN business, headed by senior VP Brent Little. 3ware CEO Faye Pairman will report to Little and join Rickey’s executive staff.

Little tells Byte and Switch that AMCC’s HBA, SATA, and storage chip platforms will come together in shipping product a year to 18 months down the road.

Does that mean SAN arrays?

“That will evolve based on our OEM and end-user requirements,” Little says. “There’s a natural progression between interconnect technologies and storage technologies, and we have an opportunity to bridge those technologies.”While product roadmaps have yet to be drawn, Rickey makes it clear AMCC is chasing the SMB market. And Little believes the combination of Fibre Channel HBAs and SATA storage can help AMCC “accelerate the growth of Fibre Channel SAN into the SMB market.”

Counting the JNI acquisition, AMCC has sunk nearly $370 million into storage. Little says the shopping spree may continue, although the goal of future acquisitions will not be to acquire technology. “We feel our technology line card is fairly filled out now with 3ware,” Little says. “Before, we couldn’t say that. We’ll be looking at things like cost synergies, additional revenue, speeding time to market.”

For 3ware, the acquisition comes 13 months after it took $26 million in funding and decided to focus on the SATA controller market (see FT: Beaucoup Losses). Indeed, Little says 3ware's appeal stemmed in part from a perceived first-mover advantage in the SATA controller market over competitors such as Adaptec Inc. (Nasdaq: ADPT) and LSI Logic Corp. (NYSE: LSI).

AMCC executives say 3ware has around 1,000 customers, and the startup generated more than $17 million in revenue in 2003. They see no effect on revenue for the current quarter that ends this month, but forecast $7.5 million in revenue for the June quarter. They also expect the overall company and storage business to become profitable in that quarter.

AMCC lost $7.1 million or $0.02 per share last quarter on revenues of $38.2 million. Those losses were up from $6.9 million or $0.02 in the previous quarter and down from $15.1 million or $0.05 year-over-year. Because 3ware had $12 million cash on hand, AMCC will have to lay out $138 million. AMCC expects to record acquisition-related charges but has yet to determine the timing and amount.— Dave Raffo, Senior Editor, Byte and Switch