From Bloomberg:
QLogic Shares Fall 25% on Concern Over Ancor
Purchase (Update4)
By John Stebbins
Aliso Viejo, California, May 8 (Bloomberg) -- QLogic Corp.,
whose semiconductors and circuit boards link computers and data-
storage systems, tumbled 25 percent on concern that its $1.31
billion purchase of Ancor Communications Inc. will damage a
relationship with a partner.
The shares fell 25 3/16 to 74 3/4 in QLogic's biggest one-day
percentage drop ever. The company agreed to buy Ancor earlier
today, saying it will pay 0.5275 share, valued at $39.43 based on
today's closing price. The per-share price is 26 percent more than
Ancor's Friday close. Ancor rose 7 to 38 3/16.
QLogic, headed by H.K. Desai, and fellow network-equipment
maker Brocade Communications Systems Inc. support each other's
products that speed communications between computers and storage
devices at greater distances. Investors are concerned that the
purchase of Ancor, Brocade's closest competitor, may deter Brocade
from recommending QLogic to customers as it does now.
``There will be negative fallout from this,'' said Ashok
Kumar, a U.S. Bancorp Piper Jaffray analyst, who rates QLogic a
``buy.'' ``But the opportunity is greater than the fallout.''
Gregory Reyes Jr., Brocade president and chief executive,
said it's unlikely that the company's relationship with QLogic
will be expanded.
``A move like this changes the nature of relationships,'' he
said. ``It's like telling your wife that you're going to date
other people. Now, QLogic is a direct competitor with Brocade.''
Rick Billy, an SG Cowen Securities Corp. analyst, said he
expects the purchase to as much as double QLogic's available
market to $6 billion from $3 billion.
QLogic said it expects the acquisition to add slightly to
earnings in 2001 and to increase them in the fiscal year ending in
March 2002. The companies said they expect the transaction to be
completed in the third quarter of 2000.
Fibre-Channel Market
QLogic, Ancor and Brocade all sell products in the market for
so-called fibre-channel equipment, a fast-growing technology that
allows corporations to greatly expand their computer networks.
Shares of fibre-channel companies had been on a roll. Until
today, for instance, QLogic shares had more than quadrupled in the
past year. Other fibre-channel companies have been hard-hit in
recent weeks.
Eden Prairie, Minnesota-based Ancor's shares have lost more
than half their value since reaching a record of 94 1/8 on Dec. 7,
when Intel Corp. said it would buy 280,000 shares of Ancor stock
for $14.8 million and work with the company to develop switches.
Emulex Corp., another rival in fibre channel, saw its shares
lose half their value on April 14 on concern about increasing
competition. QLogic was spun off from Emulex in 1994.
Customers
Ancor's customers include EMC Corp. and MTI Technology Corp.
QLogic's customers include Compaq Computer Corp., Sun Microsystems
Inc. and International Business Machines Corp.
Desai, QLogic's chairman, president and chief executive, is
an electrical engineer who joined the company in 1995 after
working at Western Digital Corp., Unisys Corp. and Sperry Univac
Corp. The acquisition of Ancor presents ``a tremendous market
opportunity'' for both companies, he said. There is a possibility
that other companies involved in fibre channel will consolidate as
the technology matures, he said.
Ancor, which makes fibre channel switches, has lost money
every year since 1994, when it first sold shares to the public. It
reported a 1999 loss of $8.73 million, less than the $14.5 million
it lost a year earlier. Sales in 1999 tripled to $13 million from
$4.39 million.
QLogic has had rising profit and revenue for the past three
years. In its fiscal year ended March 1999, net income almost
doubled to $25.7 million from $13.4 million. Revenue rose 44
percent to $117.2 million from $81.4 million.
Investors are concerned about Ancor's losses and how they
might affect QLogic's results, said Mark Kelleher, a SunTrust
Equitable Securities analyst who has a ``buy'' rating on both
QLogic and Ancor. On the other hand, Ancor needs to have a strong
partner like QLogic to compete against Brocade, the No. 1 fibre
channel switch maker, he said.
Brocade
Brocade's Reyes said his company has a 90 percent share of
the fibre-channel switch market.
``This puts QLogic in competition with Brocade, and that is a
dangerous place to be,'' Kelleher said.
Still, Brocade shares fell 12 1/16 to 124 in part because the
purchase would put Ancor in a stronger position, Kelleher said.
Brocade's stock has risen about 26-fold since an initial public
offering last May, and has gained 40 percent this year.
Ken Hendrickson, Ancor's chief executive, will be nominated
to become a member of the QLogic board when the acquisition
closes. Hendrickson told analysts on a conference call this
morning that being bought by QLogic ``gives us the critical mass
and the resources to be able to run a good race'' against Brocade.
SG Cowen Securities advised QLogic, and Goldman, Sachs & Co.
advised Ancor. |
