Facing shareholder pressure, Emulex may cash in its chips
Emulex Corp. in Costa Mesa designs and makes chips that help data move faster through computer servers and storage networks.
The company’s Ethernet and Fibre Channel products have been built into the server and storage products of such well-known companies as Dell Inc., Intel Corp., Cisco Systems Inc., Hewlett-Packard Co., Oracle Corp. and IBM Corp.
Fibre Channel is a rival networking standard to Ethernet for transmitting data between computer devices.
The company, founded in 1979, said in its fiscal third-quarter financial report that its products can be found somewhere in the data centers “of nearly all of the Fortune 1000” companies.
Emulex’s monitoring and management solutions, including its portfolio of network visibility and recording products, “provide organizations with complete network performance management” at ultra-high speeds, the company said.
The latest
Some major shareholders have been pressing directors to sell the company. Altai Capital Management, for example, strongly urged Chairman James M. McCluney in a letter in May to make such a move.
“We contend that the best course of action is for Emulex to initiate a sale process,” said Rishi Bajaj, chief investment officer for Altai Capital Management, “and we therefore request that the current board engage financial advisors immediately to undertake this task in earnest.”
Others agree. Youlia K. Miteva, managing member of Proxima Capital, which also owns Emulex shares, said that a sale “is the most obvious way for them to unlock value” in the company.
Emulex hired Goldman Sachs Group Inc. to help the company evaluate its options, including a possible sale, according to a Bloomberg News report this month.
The company declined to comment.
One analyst estimated that Emulex could be worth $9.60 to $10.60 a share if it is sold, a range that would be 19% to 32% above its Friday closing price of $8.05.
As part of a succession plan, McCluney, 62, left his post as chief executive to become executive chairman of the board, effective July 15. Jeffrey W. Benck, 48, was named president and chief executive and joined the board.
Paul Folino, a longtime top Emulex executive, stepped down as chairman but remained on the board.
Accomplishments
Over 34 years, Emulex has built itself into a major supplier of computer gear and software that connects devices and components. It maintains state-of-the-art development centers in Bangalore and Hyderabad, India; and Auckland and Hamilton, New Zealand.
It also has facilities in the California cities of Roseville, San Jose, Sunnyvale and Costa Mesa, as well as in Austin, Texas; Bolton, Mass.; Chantilly, Va., and Wayne, N.J.
This month, Emulex said it had signed Taiwanese distributor Unitech in Taipei to broaden the reach of its products in Asia. Last month, the company said the Australian Securities Exchange had chosen Emulex products to monitor trade flow in “near real time.”
In April, Emulex completed the acquisition of Endace Ltd., a specialist in network performance monitoring, for $130 million.
Challenges
Emulex lost $7 million in its fiscal third quarter, which ended March 31, wiping out its profits in the first two quarters as sales softened. Revenue fell 7% to $116.8 million, its lowest quarterly revenue in more than two years.
The company’s shares suffered as a result, falling to a closing low of $5.84 on May 1. Recently, though, they climbed to a 12-month high of $8.32 on July 18.
But even with the run-up, the price is substantially below Broadcom Corp.’s bid of $11 a share, which Emulex rejected in 2009. And shareholders remain unsatisfied.
Analyst views
Three analysts recommend buying the stock, nine suggest holding it and three say investors should sell. They believe the stock will be trading for $7 a share in one year, which is 13% below its Friday close.
In a recent note on Emulex, Piper Jaffray analysts Andrew Nowinski and Daniel Garofalo said that Emulex rivals, such as NetApp Inc., “have more favorable fundamentals at a similar valuation.”
Piper Jaffray has a neutral rating on Emulex. In their note, the analysts said they believed the recent rise in share price in Emulex mostly “reflects optimism for an acquisition.”
