Emulex to Acquire 10GbE Chip Partner ServerEngines

Emulex Corporation has signed a definitive agreement to acquire ServerEngines Corporation, a privately-held, fabless semiconductor company founded in 2004 and headquartered in Sunnyvale, California.

“Over the past two years, our partnership model with ServerEngines has been an extremely effective strategy to establish Emulex in both the 10Gb/s Ethernet and converged networking markets,” said Jim McCluney, Emulex’s President and Chief Executive Officer. “However, the combination of ServerEngines’ Ethernet and Internet Small Computer System Interface (iSCSI) expertise with our own data center technologies and world-class engineering team in an acquisition provides a significant opportunity to solidify Emulex’s Ethernet-driven network convergence strategy for 2011 and beyond,” McCluney added.

ServerEngines has two primary product families
focused on the server and storage market:

• ServerEngines’ BladeEngine family of 10Gb/s Ethernet ASICs provides a best-of-breed performance, and is architected to meet the cost and footprint requirements for Local Area Network on Motherboard (LOM) applications. Using this ASIC for board level products, Emulex’s award-winning OneConnect Universal Converged Network Adapters (UCNAs) have been selected by leading server and storage Original Equipment Manufacturers (OEMs) including Dell, EMC, Hitachi Data Systems, HP, IBM and NetApp for connectivity solutions
• ServerEngines’ Pilot family of Server Management Controllers reside down on the motherboard enabling remote IP based “lights out” management capabilities including Baseboard Management Control, Graphics and KVM-Over-IP for server platforms. Pilot ASICs are currently being used by leading industry standard server OEMs and Original Design Manufacturers (ODMs) including Cisco, HP, NEC, and Unisys.

ServerEngines has approximately 170 employees, primarily engineers, based in Sunnyvale, California, Austin, Texas and Hyderabad, India.

McCluney continued: “We believe that the addition of LOMs and Pilot Server Management Controllers from the acquisition will broaden our strategic position as a key infrastructure provider to server OEMs by providing a single and simplified interface for customers to engage on future development, support and communications as converged networks move out of the labs and into production environments over the next year. We also expect the acquisition will provide a more cost effective model in the 10Gb/s Ethernet LOM and UCNA markets, as well as enabling us to more effectively address opportunities in the target storage market, as our volumes increase in 2011. We estimate that the incremental opportunity for the new products to be acquired, will add as much as $350 million to our Total Addressable Market (TAM) by 2013.”

Under the terms of the merger agreement and subject to satisfaction of the closing conditions, Emulex will acquire ServerEngines for approximately $78 million in cash and eight million shares of Emulex stock to be issued at closing. Using Friday’s closing price of $10.11, this would represent an additional $81 million of consideration. The agreement further provides for the payment of an additional four million shares of Emulex stock, which will be issuable if the ServerEngines business achieves certain milestones targeted for completion by the end of 2011. Emulex will also assume the outstanding ServerEngines debt, including debt owed to Emulex, which is currently $25 million, other liabilities, and ServerEngines stock options upon close. Both the Emulex and ServerEngines’ boards have unanimously approved the acquisition and it is expected to be completed in July 2010, subject to receipt of ServerEngines stockholder approval and satisfaction of other closing conditions.

Business Outlook
Although actual results may vary depending on a variety of factors, many of which are outside the Company’s control, Emulex is reiterating its guidance of total net revenues in the range of $100 – $103 million for its fourth fiscal quarter ending June 27, 2010 provided on its April 2010 earnings call. With the addition of approximately $1 million in transaction related legal and other expenses during the 2010 fourth quarter, the Company now expects non-GAAP earnings per diluted share of $0.15 -$0.17 in the fourth quarter. On a GAAP basis, Emulex expects earnings per diluted share of $0.04 – $0.06 in the fourth quarter. GAAP estimates for the fourth quarter reflect approximately $0.11 per diluted share in expected charges arising primarily from amortization of intangibles and stock-based compensation. Based on the anticipated time of closing of the ServerEngines acquisition, the GAAP estimates for the fourth quarter do not reflect any amortization or equity compensation charges associated with the transaction.

Upon completing the acquisition, the Company expects the Pilot products will provide up to an additional $4 million per quarter in total net revenues. The Company’s outstanding share count will increase by eight million in the quarter in which the transaction closes, and if the earn out milestones are each met, an additional two million shares are expected to be issued in the Company’s fiscal year 2011, and an additional two million shares are expected to be issued in fiscal year 2012. The merger agreement provides for acceleration of these payments in certain events. Taking into account this increase in fully diluted shares and the expected timing of issuance, the transaction is expected to reduce GAAP and non-GAAP earnings per diluted share by $0.09 cents per quarter through the second half of calendar 2010, and become accretive in calendar 2011. The GAAP earnings per diluted share for the same period will be impacted by additional amortization and stock-based compensation charges related to the acquisition.