Broadcom Bids for Gadzoox

Chipmaker Broadcom Corp. (Nasdaq: BRCM) has emerged as the leading bidder for the assets of bankrupt Fibre Channel switch vendor Gadzoox Networks Inc. (OTC: ZOOX), according to the investment banker advising Gadzoox in its bankruptcy filing.

Broadcom submitted an asset purchase agreement for Gadzoox's assets with a bid of $8.5 million a week and a half ago, says Nels Nelsen, a partner with Alliant Partners.

Gadzoox, which saw its shares triple when it went public in July 1999, had a market capitalization of $2 billion in December of that year.

The next step in the process will be an auction for Gadzoox, to be held Feb. 14. Any other interested bidders must pay a $500,000 deposit by next Friday, Feb. 7, to be able to participate. "If no other bidder comes forth, the [bankruptcy] court will probably approve the sale to Broadcom," Nelsen says. He says other parties have expressed interest in picking up Gadzoox's assets, but he was not at liberty to name them.

In an unusual twist, Carl Berg, CEO of Cupertino, Calif.-based Mission West Properties, will acquire Gadzoox's legacy product line inventory, according to Nelsen. That means Broadcom would pay $8.5 million minus the value of certain inventory, cash, and receivables. "Net/net, it's projected that they'll pay slightly less than $5 million" for Gadzoox, Nelsen says.Gadzoox, in a press release Thursday, said it had filed a motion Jan. 22, 2003, with the U.S. Bankruptcy Court for the Northern District of California seeking approval of "an asset purchase agreement." Gadzoox did not name the potential buyer, but noted that any sale of its assets would require the approval of the bankruptcy court. The company filed for Chapter 11 bankruptcy August 22, 2002 (see Gadzoox Turns Profit and Gadzoox Runs Out of Road).

The Santa Clara, Calif., company also said it had recorded its first profitable quarter, for the fourth quarter of 2002, earning $70,000 on revenues of $4.9 million. [Ed. note: Just in time!] The formerly Nasdaq-traded company acknowledged, though, that when it emerges from bankruptcy proceedings its existing stock will be worthless.

Nelsen says he anticipates that most if not all of Gadzoox's 47 employees will be offered positions with Broadcom (or the eventual winning bidder) or Berg.

Neither Broadcom nor Gadzoox representatives responded to requests for comment. Gadzoox's bankruptcy lawyer, Ron Bender, a partner with Levene Neale Bender Rankin & Brill, declined to comment.

Robert Montague, a storage industry analyst with RBC Capital Markets, says if Broadcom ends up acquiring Gadzoox's assets it will pursue an embedded Fibre Channel strategy, in which the company would sell Fibre Channel-based application-specific integrated circuits (ASICs) to server and storage companies to embed in their systems.However, Montague says, Broadcom's entry into the market "will require significant investment in firmware and drivers to move beyond switches." Furthermore, OEMs Broadcom would potentially cater to are already closely aligned with such suppliers as QLogic Corp. (Nasdaq: QLGC) and Emulex Corp. (NYSE: ELX). IBM Corp. (NYSE: IBM), for example, is using QLogic's FC chips in its blade server systems.

Broadcom has edged closer to the storage market via its subsidiary ServerWorks Corp., which launched its first storage controllers earlier this month (see ServerWorks Samples Serial ATA).

But, says Montague, while ServerWorks is "a formidable player in I/O, Broadcom, as a whole, does not currently have access to commercialized endpoint silicon, even with the acquisition of Gadzoox's assets." Broadcom specializes in silicon for broadband communications and networking equipment.

It's worth noting that two other silicon suppliers, PMC-Sierra Inc. (Nasdaq: PMCS) and Vitesse Semiconductor Corp. (Nasdaq: VTSS), which were previously focused on telecom equipment chips, have recently entered the Fibre Channel components market (see Chipmakers Turn to Storage).

Broadcom's potential acquisition of Gadzoox would officially close the books on the one-time Fibre Channel leader and pioneer. Founded in 1992, Gadzoox imploded over the past year after it was unable to compete in the Fibre Channel switch market, primarily against Brocade Communications Systems Inc. (Nasdaq: BRCD). The company has found only limited success in trying to license its core FC technology (see Gadzoox Throws Hail Mary, Gadzoox Needs Bux, Gadzoox Licenses FC to Trebia, and Zoox Books Deutsch OEM