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Investors Deliver Another Big Blow to QLogic's Stock

Communications: Aliso Viejo chip maker's shares drop 17% one day after they lost 25% because of proposed acquisition.


Investors pummeled QLogic Corp.'s stock Tuesday for the second day in a row after the Aliso Viejo chip manufacturer unveiled plans to buy a money-losing maker of equipment for data storage networks at a hefty premium price.

The stock, which tumbled 25% after the deal was announced Monday, was off an additional 17% Tuesday as traders ignored industry analysts who asserted that the sell-off is an overreaction. The stock lost $12.81 to end the day at $61.94 a share.

Also dropping 17% in value was the stock of Ancor Communications Inc., the Eden Prairie, Minn., fibre-channel switch maker that QLogic will acquire. Ancor shares lost $6.56, to close at $31.63 a share.

Under terms of the deal, neither company can bail out because of fluctuations in the stock price. But QLogic's swap of 0.5275 of a share for each share of Ancor is still subject to stockholder approval--and 16.4 million shares traded hands Tuesday, about eight times the average daily number over the last three months.

Executives at both companies urged investors to give the companies time to explain the benefits of the planned purchase, but Wall Street is growing impatient with deals involving money-losing companies.

"In a tougher market, people may not be waiting around to hear the stories of the synergies" between two companies, said market analyst Todd Jadwin, managing director of Banc of America Securities LLC.

Analysts said investors still were worried about Ancor's poor performance, the hefty premium of 69% over Ancor's stock price and the likely erosion of QLogic's relationship with a major ally.

Since announcing the stock swap early Monday, QLogic and Ancor have seen the value of the deal fall from an initial $1.7 billion based on QLogic's closing price Friday of $99.94 a share to less than $1.1 billion Tuesday. The premium has dropped to 3.3% of Ancor's stock price.

"The market is very skittish about transactions of all sorts. They're going to distrust first and figure they can get back later," said Tom Anderson, QLogic's chief financial officer.

Investors don't have enough information yet to make "a fully formed decision," he said.

Ancor, which lost $8.7 million last year and $38.3 million over the last four years, has "always had the best technology," but just "started a little later" than other firms, said its chairman, Kenneth E. Hendrickson.

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 QLogic's purchase of Ancor, Brocade's closest competitor, may deter Brocade from recommending QLogic to customers, as it does now.

Brocade's president, Gregory Reyes Jr., has said the deal would severely strain his firm's relations with QLogic.

Hendrickson, however, said QLogic will give Ancor a leg up in trying to lure some of Brocade's customers, including Dell, Compaq Computer Corp., International Business Machines Corp. and Network Appliance Inc., all of which are also QLogic customers.

"I'm very optimistic that with our superior technology, and our tie with QLogic, who has an excellent reputation as a service provider, we can have a good chance at those customers," Hendrickson said.

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