For Emulex, Broadcom Suit Is A Threat To Next-Gen Tech

Emulex Corp. (ELX), after winning the battle to stay indepedent from Broadcom Corp. (BRCM), now finds its future growth areas under siege.

Broadcom's patent complaint against its would-be acquisition targets the next-generation of technology both firms expect will link the different pieces of hardware in data centers. As such, analysts say preliminary injunctions won't impact Emulex's current products or revenue.

More at issue, however, is the prospective business Emulex spent so much time touting amid Broadcom's hostile takeover attempt. And the infringement case, if it appears that it may be successful, could bring Emulex back to the bargaining table.

On Monday, Broadcom filed a complaint with the U.S. District Court for the Central District of California alleging that Emulex is infringing ten patents related to high-speed data and storage networking technologies.

The suit, coming about two months after Broadcom ended its attempted takeover of Emulex, focuses on a networking technology which Emulex is using in its pursuit of the market for a combo networking device known as fibre-channel over ethernet.

Both Broadcom and Emulex see fiber-channel over ethernet, or FCOE, as the next big shift in how servers and storage devices are linked in data centers, but for a number of reasons, including a lack of standards, the new technology hasn't yet caught on.

Emulex doesn't generate any of its current revenue from the new technology, and analysts don't see FCOE products impacting the company's sales until 2011.

"It's really all about the future; it's not about the current business," ThinkEquity analyst Rajesh Ghai said.

But the complaint could impact a great deal of the prospective business Emulex announced over the past few months in its successful attempt to hold off Broadcom's takeover.

When Broadcom announced its unsolicited bid in April, Emulex argued that the proposal undervalued the company on the grounds that future contracts which Emulex was lining up - and Broadcom knew about - made the offer inadequate.

Emulex has since announced "design wins," from networking gear customers, such as International Business Machines Corp. (IBM), that the company says will result in significant future revenue growth.

The patent-infringement lawsuit, however, could make future business partners nervous about teaming with Emulex, should they be found to have violated Broadcom's patents, JMP Securities analyst Samuel Wilson said.

Customers may freeze their expected Emulex product deployments, seek alternative suppliers in addition to Emulex or simply move forward more cautiously, he said.

Emulex shares were recently trading down 11 cents to $10.42, still well above the stock price of $6.61 before the first report of Broadcom's takeover plans. Shares have been helped by a broader market recovery, as well as hopes that Broadcom might renew its acquisition campaign.

ThinkEquity's Ghai said the infringment case could reflect a larger plan by Broadcom to bring Emulex into negotiations.

"I think this is a ploy to get Emulex back to the bargaining table," he said.

"Eventually if there is a case of patent infringement, then Emulex could end up paying, and they might say, 'You know what, let's start talking about a merger,'" Ghai said.

Emulex didn't respond to requests for comment. Broadcom counsel for patent matters David Rosmann said that after the failed acquisition attempt, "We've gone in a different direction and are competitors" with Emulex.

"This is about a competitor using our technology," he said.

-By Jerry A. DiColo; Dow Jones Newswires; 212-416-2155; [e-mail]