QLogic Shares Plummet Upon News of Its Ancor Buyout Plan

Chip maker QLogic Corp. said Monday that it plans to buy a fellow maker of equipment for data storage networks in a stock swap initially valued at $1.7 billion, but the news sent its shares--and the value of the deal--tumbling 25%.

The Aliso Viejo company said it will acquire Ancor Communications Inc., of Eden Prairie, Minn., to help it expand into a new area of the rapidly growing market for fibre-channel communications.

But Wall Street battered QLogic’s stock. Analysts said investors questioned the addition of a money-losing company, the impact on individual shareholder stakes and, most worrisome, the likelihood that the deal would erode QLogic’s relationship with a major ally.

By the end of the day, QLogic’s shares had fallen $25.19 a share to $74.75, putting the value of the acquisition at $1.3 billion.

The deal puts QLogic squarely in competition with Brocade Communications Systems Inc., a San Jose company that controls about 90% of the market for so-called fibre-channel switches.

The two companies support each other’s products, which speed communications between computers and storage devices. Investors are concerned that the purchase of Ancor, Brocade’s closest competitor, may deter Brocade from recommending QLogic to customers as it does now.

News of the deal drew a chilly reaction from Brocade’s president, Gregory Reyes Jr.: “The nature of the relationship changes when you come home and tell your girlfriend that you’re getting married.”

But Larry Fortmuller, QLogic’s vice president of marketing, said: “There’s been cooperative activity among all those players over the years, and we expect that to continue.”

Despite investor concerns, analysts called the precipitous drop in QLogic’s share price--its largest single-day percentage drop--an overreaction.

Ashok Kumar, an analyst at U.S. Bancorp Piper Jaffray, said the purchase makes sense. Although there is no product overlap between QLogic and Ancor, there is a common customer base. He also predicted that Brocade will lose market share to QLogic-Ancor.

Ancor, he said, has “very good technology,” but it has not “executed” its business plan very well, losing $8.7 million last year.

Rick Billy, managing director of SG Cowen Securities Corp., called the huge drop in QLogic’s stock price “absurd” and said the company’s expansion makes sense.

“They will now have the broadest product line of any company in the fibre-channel market,” said Billy, whose firm served as financial advisor to the company on the deal.

The total market for fibre-channel components for storage devices was about $500 million last year and will continue to grow quickly over the next four years, said Tom Anderson, QLogic’s chief financial officer.

He said the company has products that can be used in about half the devices on the market, and, with the merger, would have a product line for 90% of the market.

The deal is likely to close in late September, Anderson said.

In Monday’s trading, Ancor shares gained $7 a share, or 22%, to close at $38.19 a share. Brocade lost $12.06, or nearly 9%, to close at $124 a share.

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QLogic Purchase

The basics on QLogic Corp.’s acquisition of Ancor Communications Inc. in a stock swap.

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QLogic Ancor Headquarters: Aliso Viejo Eden Prairie, Minn. Business: Products linking computers High-speed network switches to data storage systems for fibre-channel technology Chief Executive: H.K. Desai Kenneth E. Hendrickson Employees: 390 165 Exchange: Nasdaq Nasdaq Monday’s close: $74.75/share $38.19/share Number of shares:* 73.5 29.15 1999 Sales:* $143.0 ** $12.95 1999 Income/Loss:* $ 40.4 ** $-8.7

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Purchase price: Stock worth $1.15 billion on Monday.

* In millions.

** First nine months, ended Dec. 31.

Stock Trend

QLogic hit a high of $203.25 a share in March, but is down overall 2.3% so far this year.

Source: QLogic, Ancor, Bloomberg News