Switch Maker Attracts Intel

Ethernet switch manufacturer Fulcrum Microsystems Inc. has been acquired by Intel Corp., a move that puts the chip-making giant into a new market offering the newest generation of components used in data centers and networks. Terms of the deal between Calabasas-based Fulcrum, a privately held company, and Intel, headquartered in the Silicon Valley, were not disclosed. Intel and Fulcrum are not strangers to each other. Intel’s investment arm, Intel Capital, was part of a $15 million funding round in spring 2010. The companies also have collaborated on compatibility testing and co-marketing efforts. The acquisition, however, is recognition of how far along Fulcrum is in developing fast, high-quality Ethernet switches, which are a vital part that allows servers in data centers to communicate with each other. “While Intel could have built their own (switch) they really liked that we have optimized our silicon switches for delivery to high performance data centers,” said Mike Zeile, president and chief operating officer at Fulcrum. The deal is expected to close in the third quarter following regulatory approval and the okay from Fulcrum shareholders. CEO Bob Nunn is expected to stay on as the general manager of the new data center switching operation at Intel and will report to the general manager of the LAN Access division. Fulcrum employs about 60 people in Calabasas and another eight in Montreal. There is the potential for additional hires in the San Fernando Valley operation as Intel makes an investment in the facility, said Stephen Schultz, director of marketing for the LAN Access Division. “We’re hoping that with their technology and the backing from Intel we can be successful in gaining market share in the silicon switch market,” Schultz said. This deal comes at the tail end of a wave of investment in the hardware sector in the tech industry, said Ben Kuo, editor and publisher of SoCalTech.com, an online publication. Companies that have been around as long as Fulcrum (11 years) are at a crossroads regarding their future. Inphi, a high-speed semiconductor company with a facility in Westlake Village, went public this year with a stock sale, Kuo said, noting the company has a similar product to Fulcrum’s and is the same age. “This is about the time where they go IPO or they get bought,” Kuo said. Other suitors Intel was not the first company to express interest in buying Fulcrum. Those other offers were turned down as the executive team focused on building a sustainable company that would eventually go public, Zeile said. The Intel bid, however, proved interesting for Fulcrum, because the company could fill in a missing piece at the larger company with its switches. Plus, having access to the resources of a $12.8 billion company was attractive, Zeile said, noting employees are excited about the deal. What came as a surprise was the timing of the acquisition, Zeile said, noting it was about two months in the making. Fulcrum has a new switch coming out in the next few months. One might have expected Intel to wait until then to make their move, he said. “Wisely, they came in before it went to market to reap the benefits of that (new product) introduction and to help with it,” Zeile said. Faster and better Intel’s purchase of Fulcrum comes as the tech industry transitions from the 1 gigabyte Ethernet switch to the 10 gigabyte switch, the type that Fulcrum makes. The faster switch makes it easier for data centers to handle network traffic (data, videos, etc.) storage, and high performance computing. In 2010, the overall Ethernet switch market reached revenues of $20 million, a 30 percent increase over 2009, the Dell’Oro Group reported in March. Revenues were expected to stay flat in 2011 but in the coming years revenues would rise primarily from the sales of the 10 gig switch, the Dell’Oro report said. Cisco, Dell, HP, IBM, and Brocade are among the top vendors for Ethernet chips. The fact that Fulcrum makes an in-demand switch was attractive to both Intel and its customers, especially as the data center market will only grow, Schultz said. “We are seeing a trend toward larger data centers with thousands of servers,” Schultz said. Craig Berger, an analyst who follows Intel for FBR Capital Markets, characterized the acquisition as a tuck-in purchase into Intel’s broader portfolio. With the billions that Intel has, whatever the company paid for Fulcrim is immaterial to its finances, Berger said. The company already has switch-making capabilities, but was lacking in the 10 gigabyte format and could gain traction through an acquisition, Berger said. “It is faster and easier to buy a superior technology,” Berger said.