QLogic Gives Up Controllers

QLogic is selling its controller chip business to Marvell Technology Group Ltd. (Nasdaq: MRVL) and will henceforth focus on its SAN HBAs and switches (see Marvell Buys QLogic Unit).

QLogic announced late Monday afternoon that Marvell purchased its hard disk and tape driver controller semiconductor unit for $225 million -- $180 million in cash and $45 million in Marvell common stock. The companies expect the deal to close within 60 days.

Now QLogic is expected to turn into a buyer. The Marvell deal will leave QLogic with around $1 billion in cash, and CEO H.K. Desai says he will likely use some of that money to invest in existing and new SAN markets.

We’ve transitioned from a silicon company to a SAN infrastructure company,” Desai said on a conference call to discuss the sale.

QLogic sells hard drive and tape controllers through OEM deals with Fujitsu Ltd. (OTC: FJTSY; Tokyo: 6702) and Hitachi Global Storage Technologies (Hitachi GST). Controller silicon accounts for about 25 percent of QLogic’s revenues, but revenues declined sequentially last quarter and Desai expects them to decline again this quarter.While shrinking, the controller business is still profitable, and the move drew an immediate negative reaction from Wall Street. Robert W. Baird & Co. Inc. and Piper Jaffray downgraded QLogic's stock this morning, and shares traded at a lower price. Others hailed the sale as a long-term positive for QLogic.

“Given QLogic’s finite customer set and weak position in next-generation controller technology, we saw this business as being an albatross,” analyst Paul Mansky of Citigroup

wrote today in a note to clients.

Desai points to several expected high growth areas where QLogic will focus. These include 4-Gbit/s HBAs and switches, iSCSI HBAs, switches and HBA mezzanine cards for blade servers, and iSCSI-to-FC bridges.

According to market research firms IDC and Gartner/Dataquest, QLogic is the HBA market leader by a slight margin over Emulex Corp. (NYSE: ELX). QLogic is also the early leader in the server blade switch market and is making strides in low-end Fibre Channel switches (see QLogic Claims HBA Lead, Report Says QLogic Tops HBAs, and QLogic Breaks 20,000).

Although QLogic has, or will soon have, products in all the growth markets Desai mentioned, he said the company will aggressively invest in these and other SAN technologies.“We will either invest to develop them ourselves, or if we need technology, we will acquire it."

Intelligent switch chip startup Aarohi Inc.

is one candidate for investment or acquisition. Sources familiar with both companies say Aarohi CEO Ameesh Divatia has been talking to QLogic about a strategic investment similar to the one Fibre Channel switch vendor McData Corp. (Nasdaq: MCDTA) made in Aarohi in 2003, or a possible acquisition (see Aarohi Advances Action Plan). McData uses Aarohi's intelligent storage processor in the switch that will support the EMC Corp. (NYSE: EMC) Invista virtualization platform next year (see EMC Unveils Invista).

Desai says around 93 QLogic employees -- mostly engineers -- will transfer to Marvell. He expects an easy transition, because QLogic has separate engineering teams for its controller and SAN businesses, and the controller team works in a leased building outside the company’s Aliso Viejo, Calif., headquarters. The controller team represents about 10 percent of QLogic’s staff.

— Dave Raffo, Senior Editor, Byte and Switch