PMC-Sierra ( PMCS) said late Sunday that it will buy Agilent Technologies' ( A) storage semiconductor unit for $425 million in cash.
The acquisition could pressure QLogic ( QLGC) Emulex ( ELX) and Applied Micro Circuits ( AMCC), companies that make chips for use in storage networks. Agilent has a significant share of the market for host bus adapters; the sale will thus put PMC-Sierra, already strong in other storage-related areas, in a position to take business from existing players. One result: lower margins as original equipment manufacturers, or OEMs, use the presence of a new player for pricing leverage, says Shaw Wu, an analyst with American Technology Research. Wu says Qlogic and Emulex currently post gross margins in the 64% to 70% range. "We believe this could decline to closer to 55-60% over the next few years if OEMs prove successful in applying leverage ," Wu wrote in a note to clients. His company does not have an investment-banking relationship with the companies mentioned in this article. He has a hold rating on QLogic and Emulex. Agilent's storage unit is a division of Agilent's semiconductor products group, which is being acquired by investment firms Kohlberg Kravis Roberts & Co. and Silver Lakes Partners. The deal with PMC-Sierra is expected to close in January; the sale of the products group in December. Meanwhile, an upgrade to outperform by Baird analyst Daniel J. Renouard, is giving shares of QLogic a modest boost. In recent trading, the stock has gained 95 cents, or 3.2%, to $30.41 a share. QLogic's stock has taken a beating of about 17% since August when it sold its hard drive and tape controller business to Marvell Technology ( MRVL), posted a disappointing secondary quarter and issued weak third-quarter guidance. The selloff, Renouard says, "is overblown." Baird is seeking investment-banking business with QLogic.