Data centers are trying to save money by consolidating today's separate network and storage traffic over future merged Fibre Channel over Ethernet (FCoE) networks. System makers are trying to save costs by buying networking boards with a complete software stack, rather than chips they have to integrate into new board designs of their own.

Broadcom grabbed the lead in the market for Ethernet chips for servers at the Gbit generation, but it has no shipping Fibre Channel chips or software or board-level products of any kind today. Emulex has all three.

"Broadcom never wanted to be in the board business, but customers are asking for it and they don't have the infrastructure for it," said Bob Wheeler, analyst with The Linley Group (Mountain View, Calif.). "This would let them compete on an equal footing with Intel in the Ethernet card business," he added.

In its bid, Broadcom said it has the design and manufacturing clout to help Emulex cut the costs of delivering its ASICs. "From my perspective the two companies have highly complementary technology and markets so the only issue I can see is the price," said Wheeler.

In rejecting the Broadcom bid, Emulex's managers suggest the key problem was the cost of that consolidation. It's too low, they say considering their company's stock price before the downturn and recent design wins it has taken from Broadcom with its 10 Gbit/s FCoE chip announced recently.

Chief operating officer Jeff Benck said Emulex is in a good position to go it alone, extending its reach beyond its traditional Fibre Channel markets to the broader Ethernet world. "There is an inflection point going on in the market, and these inflexion points are unique opportunities for market share shift," said Benck.

He would not comment on whether the Emulex board might accept a higher offer from Broadcom. However, he did say Emulex sees "a clear trend" to server makers wanting to buy network boards rather than chips.

Interestingly, Emulex does not need Broadcom for Ethernet technology. It struck a deal with startup ServerEngines to use its 10 Gbit Ethernet core in the Emulex FCoE ASIC. Benck would not give details of that deal, but reiterated that its 10G FCoE products will be in production at the end of the year.

Broadcom has about $500 million in annual revenue in server Ethernet chips, a business that the new Emulex chip is threatening, said Alex Gauna, analyst with JMP Securities in a research note. "We believe Broadcom will have no choice but to up its bid," Gauna wrote.

Meanwhile, Emulex's archrival, QLogic quietly announced last week it purchased Ethernet startup Netxen for about $21 million. The startup gives the Fibre Channel company a stronger footing in Ethernet technologies including full hardware offload of TCP processing and support for iSCSI, an Ethernet storage protocol Emulex's new chip already supports.

"QLogic still has gaps in their product line," said Benck.

It's not the first or last acquisition driven by converging data center networks. Last year, Brocade bought Foundry Networks for $3 billion to better address converging markets for network gear.