Last week, data storage leader Emulex (NYSE:ELX) agreed to purchase Vixel (NASDAQ:VIXL) for $310 million in cash or $10 per share. At a glance, this looks like a deal from the party days of 1999 -- roughly 10 times Vixel's 2003 revenues. Or, to use another heyday metric: $5.4 million per engineer.
Is it worth the price? It very well may be. There are times when seemingly nosebleed valuations result in the best acquisitions. Indeed, while mistakes are made, they often signal an industry poised for growth (why else pay such a big premium?)
And, surely, the growth in e-tailers, search engines, and corporate intranets creates a need for data storage. This is likely to be a long-term trend. After all, technologies are getting more sophisticated. There is also the refresh cycle; old equipment needs to be replaced.
Already, the major storage players -- Brocade (NASDAQ:BRCD), McData (NASDAQ:MCDT), and Network Appliance (NASDAQ:NTAP) -- are seeing a pick-up in business. And rising confidence typically means more mergers and acquisitions.
Recently, for example, EMC (NYSE:EMC) shelled out $1.3 billion for Legato Software. The company plans another big acquisition by the end of the year (rumors are that the target is Quest Software (NASDAQ:QSFT), a software developer for database management).
As for Vixel, it has managed double-digit sequential growth for the past year, and this looks likely to continue. With Emulex's distribution, this growth can be accelerated. Already, Emulex has affirmed its revenue and net income guidance for the first quarter ending September.
To its credit, Emulex has aggressively funded R&D through the hard times, and this is starting to pay off in terms of patents and cutting-edge features. The Vixel acquisition will only add to the company's impressive portfolio of intellectual property.
Clearly, Emulex could as easily have used its stock to buy Vixel. Apparently, management thinks the stock is too cheap, and preferred to pay in cash. It looks like Emulex is sending a lot of signals and one clear message to investors: buy.
Tom Taulli is the author of six books on investing, including the StreetSmart Guide to Short Selling (McGraw-Hill), as well as a professor of finance at the USC School of Business (don't worry, he does come out of his ivory tower). You can reach him at[email protected].
