Emulex Secures Sierra Logic

Emulex took another step to diversify its products beyond Fibre Channel HBAs Tuesday night when it agreed to acquire Fibre Channel-to-SATA bridge and router startup Sierra Logic for $180 million.

That pricetag includes cash, assumed debt, and Sierra Logic stock options, plus employee equity incentive compensation. Emulex execs say they expect to generate $8 million to $10 million in revenue next quarter from Sierra Logic products.

Sierra Logic makes ASICS for devices that connect SATA drives to Fibre Channel storage systems. It has OEM deals with Emulex partners Engenio, Hitachi Data Systems, Network Appliance, NEC, Sun, Xyratex, and other storage vendors. Sierra Logic claims it has shipped more than two million SATA ports and owns 85 percent market share of the Fibre Channel-to-SATA bridge market.

Competitors for Sierra Logic in this space include newcomer Ario Data Networks, which is in the process of completing a $5.9 million round of funding to add to its $27 million; Marvell Technologies; and SiliconStor. Clearly, competition is taking shape among FC-to-SATA bridging components.

Still, the price Emulex paid for Sierra Logic seems a bit high considering Sierra Logic's current revenue stream, but Emulex is banking on the continued growth of low-cost drives -- and it needs to broaden its product portfolio."Diversifying ourselves beyond a one-trick pony as a Fibre Channel HBA vendor is critical for us," Emulex CEO Paul Folino said on a conference call with analysts. "This is one step along that way."

Sierra Logic is the second startup Emulex has acquired in four months. It picked up storage virtualization chip startup Aarohi in April. (See Emulex Buys Aarohi and Aarohi Mum on Acquisition Talk.)

Emulex's shopping spree is a response to criticism from technology and financial analysts who've taken the company to task for failing to diversify its product portfolio as quickly as its major HBA rival QLogic has done. (See QLogic Bets on InfiniBand.) Reliance on one product hurt in the first quarter of this year, when delayed launches of storage products by EMC and IBM resulted in a disappointing quarter for Emulex. (See Storage Financials Take a Dip and Emulex Below Forecast.)

Emulex executives say Sierra Logic's products can be combined with InSpeed embedded switches Emulex acquired from Vixel in 2003 to address low-cost, high-capacity alternatives to Fibre Channel drives for disk array suppliers. (See Emulex Drops Cash for Vixel.) Sierra Logic bridges and routers are already used in SATA systems, and Emulex InSpeed switches show up in nearline Fibre Channel ATA (FATA) drives. Emulex has announced InSpeed OEM deals with Engenio, Fujitsu, HP, NEC, and Xyratex.

An Emulex/Sierra Logic combination can thus be used to create lower-cost FC alternatives for SAN suppliers. "They make a SATA drive look like a Fibre Channel drive to the storage controller, for all intents and purposes," Emulex president Jim McCluney said of Sierra Logic's technology.Financial analyst Daniel Renouard of R. W. Baird calls Sierra Logic "a good strategic fit" for Emulex. In a research note today, he wrote: "Management is building on the Vixel acquisition... We believe the embedded market will prove a nice niche for Emulex over time, and synergies between Vixel and Sierra Logic appear tangible - similar customer bases and complementary technology."

Emulex expects the deal to close around the end of September. Sierra Logic has 70 employees, mostly engineers based in Roseville, Calif. Folino did not say how many employees would be retained, but Sierra Logic CEO Bob Whitson will join Emulex as SVP of its embedded products unit, which will include the Sierra Logic and Vixel products.

Dave Raffo, News Editor, Byte and Switch