Analyst Sees Emulex/LSI Combo

RBC's Tom Curlin says LSI Logic wants Emulex. What's not clear is where Intel factors in

July 12, 2005

3 Min Read
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LSI Logic Corp. (NYSE: LSI) and Emulex Corp. (NYSE: ELX) are in talks, and a merger could result. So says analyst Tom Curlin of RBC Capital Markets in a note to clients today. The notes states:

  • We believe LSI and Emulex are discussing a variety of strategic scenarios, including a combination... We feel the recent management changes at LSI signal forthcoming modifications or enhancements to the company's strategic roadmap. To this end, we believe LSI and Emulex are discussing a variety of strategic scenarios that might benefit both companies.

Curlin suggests that LSI Logic is worried about the partnership Emulex has with and might be willing to pay a hefty premium on Emulex shares to either disrupt or own it. Indeed, Curlin says LSI may be willing to pay up to $24 per share for Emulex, which could put a potential deal at nearly $2 billion or more.

At press time, shares of Emulex were trading at $19.98, up $0.59 (3.07%). Shares of LSI Logic were trading at $10.07, up $0.30 (3.07%). It's not clear whether the increase was due to merger talk or to announcements from both companies, including a new OEM deal between Emulex and Sun Microsystems Inc. (Nasdaq: SUNW). (See Sun, Emulex Strike OEM Deal.)

LSI Logic is keenly interested in preserving a solid component presence. It increased its guidance recently on the strength of its storage components (see LSI Logic Improves Forecast). The vendor is set to announce quarterly results July 27.

It also doesn't hurt that LSI's new CEO, Abhi Y. Talwalkar, and new EVP Jeff Richardson both hail from Intel (see LSI Logic Changes CEO and LSI Logic Names EVP). Presumably, the knowledge these execs have of what's at stake could guide them in decision-making.Emulex and Intel forged a development agreement back in 2003 and plan to jointly offer storage processors that support Intel's XScale processors with Emulex's Fibre Channel and SAS/SATA drivers (see Intel & Emulex: iSCSI Tag Team?). Speculation puts delivery sometime next year.

If Intel and Emulex go ahead as planned, that could threaten Emulex's use of LSI's foundry and affect revenues that Curlin estimates to be worth $200 million to $400 million annually to LSI Logic.

What remains unclear in Curlin's note is whether Emulex would have to give up its links to Intel in the event of a merger. If Emulex did have to, it may render the merger hardly worthwhile, unless the price was right. If not, the resulting combination could be a formidable one for the industry, combining the strengths of three major OEMs, with associated input from LSI Logic subsidiary Engenio Information Technologies Inc.

Several other industry analysts contacted by Byte and Switch steered clear of any speculation about Curlin's note. At least one, who asked not to be named, has been aware of talks between LSI Logic and Emulex. Others were not willing to venture a guess either way.

Intel and Emulex spokespeople did not return calls for comment at press time. An LSI Logic spokeswoman declined to comment on rumors.Mary Jander, Site Editor, Byte and Switch

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