Emulex board rejects Broadcom’s $764 million offer
Emulex Corp. formally rejected an unsolicited buyout offer from its Orange County neighbor, chip maker Broadcom Corp., on Monday, calling the $764-million cash offer “opportunistic” and too low.
The Costa Mesa networking equipment company said the bid “significantly undervalues Emulex and is not in the best interest of Emulex stockholders.”
Irvine-based Broadcom launched the hostile takeover campaign April 21, four months after being quietly rejected by Emulex’s board.
Analysts had widely expected Emulex to reject the $9.25-a-share bid because the company’s stock, which closed at $6.61 the day before Broadcom launched its bid, had traded close to $14 a year earlier.
After Emulex turned down the offer Monday, its shares rose 38 cents, or 3.7%, to $10.75. Broadcom’s stock gained 88 cents, or 3.8%, to $23.94.
“We are evaluating our options,” Broadcom spokesman William Blanning said.
Broadcom makes, among other things, networking equipment that connects high-powered servers. Emulex’s chips connect storage disks containing massive amounts of data, called fibre-channel storage. Broadcom Chief Executive Scott McGregor said in April that a merger would allow the two companies to combine their technologies to create equipment that could do both interchangeably, entering a market segment called “converged networking.”
Glenn Hanus, an analyst at Needham & Co., called Broadcom’s offer “credible but opportunistic,” meaning that it was timed to take advantage of a recent slump in Emulex shares. He said the bid could put Emulex in play.
“We believe that there could potentially be other interested partners,” he wrote in a note to clients.
Emulex CEO Jim McCluney declined to say whether his company had been approached by other suitors. Instead, he emphasized in an interview that Emulex was prepared to tackle the converged networking market without Broadcom. Major customers over the last three months had been selecting Emulex over Broadcom to supply converged networking equipment, and Emulex will start seeing “meaningful revenue” from those contracts in 2010, the company said.
McCluney estimated that the market for such equipment would more than double, to $1.5 billion by 2013 from $700 million this year, fueled in part by companies that want to save money by using a universal connector instead of two separate technologies.
The market for data centers is also growing rapidly as companies store vast amounts of information on such things as Web traffic, customer orders and employee benefits.
“The thirst for data continues unabated,” McCluney said. “In addition, this particular new technology really has tremendous economic advantages. You’re converging data traffic into one wire, which results in a 28% savings on equipment. There’s also a 42% savings on power consumption when you combine equipment.”
For Broadcom, that adds up to a real threat, said JMP Securities analyst Alex Gauna, who expected Broadcom to come back with a higher offer.
“Technically, Emulex can go it alone and could arguably end up being more successful than Broadcom,” Gauna said. “Emulex knows they have Broadcom between a rock and a hard place.”
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