International Business Machines Corp.’s acquisition of Sun Microsystems Inc. could be bad news for the small suppliers that have grown up around the computer industry as their largest customers fuse.
Network gear makers QLogic Corp. and Emulex Corp. would be among suppliers with fewer places to sell their products, channeling pricing power to buyers, said Peter Falvey, managing director of investment bank Revolution Partners LLC. IBM is in talks to buy computer-server maker Sun, people with knowledge of the matter have said.
QLogic, Emulex and Mellanox Technologies Ltd., which makes products that help servers communicate, have a combined market value of less than $3 billion and their annual sales are equal to about 1 percent of IBM’s. They get about half their revenue from IBM, Hewlett-Packard Co., Dell Inc. and Sun, according to data compiled by business relationship Web site Connexiti.com.
“The real threat is it’s a 1 plus 1 equals 1.7 situation,” Boston-based Falvey said in an interview. “I’m sure those guys are nervous.”
Emulex gets about 35 percent of its revenue from IBM and Sun, compared with 27 percent for QLogic and 23 percent for Mellanox, according to Connexiti. A combined company would have the scale to press suppliers for lower prices, potentially reducing the value of sales, Falvey said.
IBM’s Dominance
The deal would give IBM, the largest maker of server computers, almost half of global server sales, and may spark a wave of acquisitions that could pressure suppliers further. That, coupled with the recession, has weighed on cash flow and available credit at those smaller suppliers, which may in turn push them to combine to stay afloat, Deloitte LLP Vice Chairman Eric Openshaw said.
“If you have a big cash war chest, you can ride this thing out,” said Openshaw, who leads the consultant’s technology group. “If you don’t, you’re probably looking to see who your most logical partner is.”
IBM, based in Armonk, New York, would pay about $10 for each share of Sun, according to the people familiar with the matter. Server computers run networks and Web sites.
Dell, the second-largest personal computer maker, and EMC Corp., the world’s biggest maker of storage computers, may be next in line to be sold, Revolution’s Falvey said. Round Rock, Texas-based Dell has cut jobs to help reduce $4 billion in expenses as it deals with a recession that’s predicted to cut PC shipments by the most ever this year, while EMC is one of the few, mid-sized companies left to target, he said.
Stock Performance
Emulex fell 16 cents to $5.52 in New York Stock Exchange composite trading at 4:01 p.m. QLogic dropped 39 cents to $11.72 on the Nasdaq Stock Market. Sunnyvale, California-based Mellanox declined 35 cents to $8.77.
Customer loyalty could help offset the impact an IBM-Sun merger would have on the companies’ suppliers, said Rajesh Ghai, an analyst at ThinkEquity LLC in San Francisco.
Businesses accustomed to using one type of technology, like the network gear that QLogic and Emulex make, are probably going to be unwilling to part with their equipment, said Ghai, who rates QLogic shares “accumulate” and doesn’t own any.
Executives at QLogic and Emulex contend that consolidation won’t hurt their business. Aliso Viejo, California-based QLogic supplies chips and switches for corporate networks. Emulex, based in Costa Mesa, California, makes components that help computers store data.
Emulex Stance
“The rumored IBM-Sun deal could have a positive impact on our storage and data networking business” by increasing sales of some products, said Scott Genereux, QLogic’s senior vice president of worldwide sales and marketing. He touted the company’s more than 10-year relationship with IBM and said there’s a “strong preference” for QLogic’s products in Sun’s user base, which may help increase sales of products that let computers work with other devices.
“We’re embracing it,” Emulex Chief Operating Officer Jeff Benck said in an e-mail. “It provides us with stronger customers.” Spokeswoman Katherine Lane declined to elaborate further.
Mellanox spokesman Brian Sparks declined to comment because the IBM-Sun talks haven’t been officially disclosed. IBM spokesman Ian Colley declined to comment on the company’s relationships with suppliers. Sun declined to comment on a possible deal with IBM, spokesman Shawn Dainas said. Representatives at Dell and Hopkinton, Massachusetts-based EMC also declined to comment.
Palmisano’s Goal
IBM Chief Executive Officer Sam Palmisano has pledged to use the recession to strengthen the company through acquisitions and research after revenue fell 6.4 percent last quarter. Global server sales will probably drop 17 percent to $44.2 billion this year, according to Credit Suisse Group AG.
Consolidation has implications for bigger companies as well. Top software maker Microsoft Corp., based in Redmond, Washington, gets about $2.4 billion in annual sales from IBM and Sun Microsystems, while Intel Corp., the world’s largest chipmaker, gets $714.1 million, according to Connexiti data.
An outside spokesman for Microsoft declined to comment, as did Tom Beermann, a spokesman for Santa Clara, California-based Intel.
While orders from IBM and Sun make up only a fraction of Microsoft and Intel’s revenue -- 3.9 percent and 1.9 percent of annual sales respectively -- a wave of customer consolidations and a drop in sales, alongside a declining economy would add up, said Sachin Shah, a mergers and acquisitions analyst at ICAP Plc.
“This is going to hit home if this becomes reality -- reality in the sense that it’s not just this deal,” said Jersey City, New Jersey-based Shah, who doesn’t own shares of IBM, Sun, Microsoft or Intel. The supply chain “is going to see a revolutionary change based on where the economy is going.”
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