Stifel analyst Aaron Rakers weighed in on QLogic (NASDAQ: QLGC) following Avago's (NASDQ: AVGO) announced takeover of Broadcome (NASDAQ: BRCM).

"We believe investors will / should question the derivative implications (short-term and long-term) this may have for QLogic (Hold, $15.43) as the combined Avago + Broadcom entity will be positioned as an end-to-end provider of Ethernet connectivity solutions - Broadcom’s Ethernet switch silicon and PHYs + Emulex’s 10GbE NIC / CNA solutions – and also a vertically integrated supplier of FC HBAs / ASICs. In fact, this is an interesting combination when considering Broadcom’s unsuccessful efforts to acquire Emulex several years ago in order to focus on the convergence of FC and Ethernet (FCoE); subsequently successful invoking patent infringement against Emulex."

He added, "This combination comes at the early stages of Avago’s integration of Emulex (closing on May 5, 2015) and thus we believe some could consider competitive disruption to be a net-positive for QLogic in the traditional / duopolistic Fibre Channel HBA market (QLogic = ~60% share). Avago, through its prior acquisition of LSI, is the primary supplier of QLogic’s FC ASICs. The company’s 10-K filing notes that it has long-term supply contract in place with Avago that it believes safeguards the supply of FC ASICs; however, it also notes that this does present some risks if Avago fails to adhere to the terms of the supply agreement. In Ethernet, we believe investors could consider the Avago + Emulex + Broadcom combination as a complete end-to-end competitor. QLogic recently highlighted its estimated ~26% share in the combined $800 million 10GbE adapter and ASIC market exiting 2014, up from only 4% exiting 1Q14 (ramp reflective of Broadcom asset acquisition). This compares to Intel’s estimated ~50% share, Emulex at 13%, and Mellanox’s share estimated at only 3%. This market is estimated to grow to +$2B by 2018. In addition to Broadcom’s positioning as a 10GbE ASIC supplier into the Ethernet switching market, which would then be combined / leveraged with Emulex’s position in the Ethernet NIC / CNA market for host connectivity, it is important to note that as part of QLogic’s completed $147.8 million March 2014 acquisition of Broadcom’s 10/40/100GbE solutions the company entered a supply agreement that requires the purchase of its Ethernet ASICs exclusively from Broadcom."

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Shares of QLogic closed at $15.43 yesterday.