Broadcom's persistent attempts to drag Emulex to the acquisition altar took another turn recently when Broadcom sweetened its offer from $9.25 per share to $11 per share of Emulex stock. Now would be a good time to stand back and do a quick reality check: Broadcom, tell us again why Emulex is now worth approximately $912 million--$148 million more than it was, say, a week ago.
In a May 5 press release announcing its first unsolicited offer, Broadcom's executives said, "Emulex has made it clear that it shares our view that the convergence of data and storage networking is the long-term future of enterprise networks. This combination would enable us to accelerate our efforts to bring this vision to our customers." While upping the ante on June 29, Broadcom amplified that statement. "Together, the talented employees of our two companies could accelerate the convergence of Ethernet and Fibre Channel. Broadcom's technology, scale, track record of execution, and highly successful history of acquisitions, along with Emulex's considerable strengths today would make a terrific combination for our combined employees and our customers."
Both statements point to the presumed convergence of data storage (Fibre Channel) and networking (Ethernet)--"presumed" because most large enterprise data centers have yet to go beyond the testing stage of this emerging technology. There is now a standard for this convergence, called Fibre Channel over Ethernet (FCoE), a protocol for attaching Fibre Channel-based storage devices to application host processors over a Gigabit Ethernet network. Emulex has been able to implement the FCoE protocol "stack" on a single chip and that's a major accomplishment worth serious money as Broadcom sees it. But at best, FCoE lives out on the bleeding edge of technology in the minds of data center administrators and other IT professionals.
At least one such person I follow, Scott Lowe, has raised questions that are likely reverberating within the enterprise IT community. In a blog item, he asks "Why deploy FCoE?" This is a serious question that he's not offering up as a lead-in to sell FCoE. And he may well be like many who, when first confronted with the idea of Fibre Channel-based data storage and networking convergence over Gigabit Ethernet, was persuaded that FCoE was the undeniable future. But now that some people within the IT community have had a chance to test-drive FCoE, doubts are emerging.
The simple fact is that no single information technology dominates the landscape for long. Mainframes had to make room for open systems and client/server. Linux ended the hegemony of Windows and the open systems primacy of Big Unix. And Ethernet will likely not be the only interconnect data center that administrators ever rely on. InfiniBand marches on like the Energizer Bunny, and Fibre Channel itself, even without the Ethernet assist, is still a long way from being at the end of its road map. We can't count iSCSI out yet either.
So, back to the Broadcom-woos-Emulex soap opera. Broadcom tells Emulex shareholders that they're crazy if they don't take the original deal. Emulex tells its shareholders not to listen to a company that used to be run by a man with a questionable past.
Unfazed, Broadcom ups the offer. Why? Because it wants that single-chip implementation of an FCoE network adapter. Emulex has it and is already claiming design wins with would-be OEM vendors. Broadcom wants into the converged data center network opportunity really badly, and it sees Emulex as the fastest way to get there, so much so that its executives are now willing to put up close to a billion dollars to get it rather than going through the cost and hassle of developing single-chip FCoE themselves. Up to now, the response from Emulex has been, "Go away, you wolf. We can get along by ourselves, thank you very much."
And that's where this standoff is now. As Emulex pauses to reflect on Broadcom's $11 per share offer, perhaps Broadcom might want to take a deep breath as well. While Emulex has other product opportunities working and has a 30-year history as a successful OEM vendor--all of which add value--Broadcom appears focused on Emulex's FCoE chip and the data center converged network thing. Data center fabric convergence a la FCoE is a major opportunity, no doubt, but pure Fibre Channel still has a considerable amount of gas left in its tank, iSCSI is getting a boost from VMware deployments, and we can't pretend not to hear the steadily advancing. The race to data center interconnect dominance has only just begun and may well wind up without a clear winner.
In the run-up to this most recent offer, Broadcom has steadily asserted that Emulex can't deliver value to shareholders beyond that which it already has. But Emulex has delivered product value for years within the context of other more stable storage networking technologies: Fibre Channel, iSCSI, and InfiniBand. FCoE is still an unknown quantity. Remember all the interoperability issues that plagued Fibre Channel years ago? Think FCoE is immune to them? Think again.
Yes, Cisco is out there hyping FCoE, and Cisco is a powerful force in the marketplace. But note that Cisco's director switch product recently lost significant market share to Brocade. Therefore, Broadcom can't depend on the power of Cisco to make the FCoE opportunity real. Data center storage administrators are a very conservative lot and have seen hype curves come and go. Reliability is king to them and FCoE has yet to prove itself on that score.
Broadcom is to be congratulated for upping their bid, not because Ethernet/Fibre Channel convergence is that big of an opportunity, but because the new offer is more reflective of the true value of Emulex as the sum of all of its parts--including the FCoE chip. The opportunity that Emulex represents remains a storage networking opportunity and not merely the dream of a converged data center fabric that may or may not be real.