Unexpected, Unfriendly Bid to Take Over Emulex Attracts Attention of Wall Street

Emulex Corp., a Costa Mesa computer products manufacturer, caught Wall Street’s attention last week when it reported it had rejected an unsolicited takeover bid valued at $11.50 a share, or $120 million.

The bidder, a Boston venture capital firm called TA Associates that already owns 7% of the company’s stock, said Emulex doesn’t have the investor interest it deserves. And some analysts would agree.

“This is a good stock for the price you are paying,” said Ronald Elijah, a securities analyst with Robertson, Colman & Stephens in San Francisco.

Emulex is a leading supplier of add-on products for Digital Equipment Corp. minicomputers. In fact, its name derives from the fact that it emulates many Digital products at lower prices. It also provides many peripherals not offered by Digital.

But one thing that it has not been able to emulate is Digital’s mushrooming rate of sales growth. Digital sales increased from $6.6 billion in 1985 to $11.4 billion in 1988. Profits jumped from $446 million to $1.3 billion over the same period.

For most of the same period, Emulex suffered flat sales and declining profits. In 1985, the company earned $7.8 million on revenue of $103.1 million. In 1987, the company earned $3.4 million on almost identical sales of $103.8 million. This year, the company bounced back, earning $9.1 million on sales of $125.1 million for the fiscal year ended July 3.

The renewed strength is based on two new products, Elijah said. One, a hard disk data storage system called SMDI, accounted for $15 million in revenue in 1988, up from $1 million in 1987, Elijah said.

Wall Street has taken note of Emulex’s new vigor. The stock moved from a low of $4.75 a share earlier this year to a recent high of $11.50. Emulex closed Friday at $10.125 per share, up 12.5 cents in over-the-counter trading.

The biggest problem faced by Emulex in the past, as well as its biggest future risk, is the position taken by Digital regarding products made by Emulex and similar companies, according to Jeff Kilpatrick, president of Newport Securities in Costa Mesa.

From Emulex’s founding in 1979 until 1984, Digital encouraged such companies to come up with products to expand the power and applications of its computers, Kilpatrick said.

“Emulex lives on the idea that they will sell you something that DEC does not offer,” he said.

But in 1985, Digital apparently shifted its strategy when it filed a patent infringement lawsuit against Emulex. The suit was settled earlier this year when Emulex agreed to pay Digital a licensing fee for certain products.

Analysts expressed surprise that TA Associates would attempt to launch an apparently unfriendly takeover bid for Emulex, since much of the company’s value resides in its management and research teams.

In January, the company underwent a major management shake-up when it removed its president of 3 years and eliminated other management positions. Fred Cox, chairman and chief executive of Emulex, assumed the additional title of president at that time.

“Emulex has one of the best management teams in Orange County,” Kilpatrick said. “To attempt to buy the company on an unfriendly basis was very unexpected.”

Unexpected enough to make Wall Street sit up and take notice.

Bridgford Foods Corp. announced a 3-for-2 stock split last week. The stock split is the second this year for the Anaheim food processing and packaging company.