Emulex Rejects Broadcom's $764 Million Bid As 'Opportunistic'

Broadcom on April 21 made an unsolicited cash bid to acquire all the outstanding shares of Emulex common stock for $9.25 per share, or a total of about $764 million.

Broadcom, Irvine, Calif., develops semiconductors for wired and wireless communications and networking. Emulex, based in neighboring Costa Mesa, Calif., develops storage networking controller chips, adapters, blades and connectivity solutions, and counts as OEM customers such vendors as Dell, EMC, Fujitsu-Siemens, Hewlett-Packard, Hitachi, Hitachi Data Systems, IBM, LSI, NetApp, NEC and Sun.

The move is potentially important as the industry moves toward a converged networking model in which one networking protocol can handle both IP networking and storage networking.

Jeff Benck, COO of Emulex, said Broadcom's offer was an opportunistic one that reflected recent Emulex wins more than the actual value of Emulex.

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Broadcom competed with Emulex in a number of recent OEM contracts that Emulex won, including 5 new 10-Gbit Ethernet NIC wins, three recent iSCSI converged networking adapter wins and four recent Fibre Channel over Ethernet (FCoE) converged network adapter wins.

"We've got great traction with OEMs," Benck said.

As a result, Emulex feels that Broadcom's offer significantly undervalues Emulex's long-term prospects, especially with converged networks, Benck said.

The Broadcom bid also is aiming to take advantage of depressed stock prices, he said.

Broadcom's bid comes at an interesting time, Benck said. While Broadcom is the dominant player in the Gbit Ethernet space, it does not dominate the 10-Gbit market.

Meanwhile, Benck said, Emulex already has 10-Gbit Ethernet products, while archrival QLogic last week acquired NetXen, a developer of 10-Gbit networking products, for $21 million.

"As we watch the last networking transitions, from 10 Mbits per second to 100 Mbits to Gbit Ethernet, the market leader always changes Broadcom clearly knows it's at risk," he said.

Benck said that a report by analyst firm Dell'oro estimated the converged networking market would be worth about $1.5 billion in 2013, or twice today's Fibre Channel market.

Data center convergence has become a major technology drive as customers look for better ways to improve the efficiency of their IT operations.

That convergence includes such things as FCoE, a new version of the Ethernet protocol that allows Fibre Channel connectivity to happen on the same network as IP traffic and could eventually work with a variety of IP and storage protocols over a single network.

Convergence in the data center also is coming from moves by major IT vendors to combine server, storage and networking technologies, as evidenced by Cisco's recent entry into the server market with its Unified Computing System (UCS) and similar moves by more established server vendors such as HP, IBM and Sun.

Emulex is a partner in Cisco's UCS strategy.

Emulex on Monday released the text of a letter from Paul Folino, executive chairman of Emulex, to Scott McGregor, president and CEO of Broadcom, in which Emulex outlined its position.

In the letter, dated Tuesday, Folino wrote that Emulex has evaluated the Broadcom offer, and that its board unanimously rejected the proposal.

Folino cited Emulex's recent converged networking OEM wins and its broad OEM customer base as showing his company's momentum and leadership in this market.

He also chided Broadcom for trying to take advantage of the confidentiality between Emulex and its OEM customers in regard to those recent wins.

"As you know, these design wins are kept confidential at our customers' request and do not typically begin contributing revenue for several quarters," Folino wrote. "Thus, Emulex's stock price does not fully reflect the long-term value-creation potential that the company has already secured. However, given that some of these design wins have come at your expense, including your core Ethernet networking business, you are uniquely aware of the future value we have secured and how well positioned we are to unseat you on many other platforms in the near future. We believe your proposal is an opportunistic attempt to capture that value, which rightly belongs to our stockholders."

Folino also wrote that Broadcom was trying to take advantage of "unprecedented macroeconomic conditions" that have caused a deep drop in Emulex's stock price, and accused Broadcom of incorrectly describing prior Broadcom-Emulex communications and Emulex's corporate governance structure.

Jayson Noland, an analyst with Robert W. Baird & Co., wrote in an opinion paper that the Emulex action was expected, and that it would not be surprising to see a higher bid by Broadcom.

However, Noland wrote, Emulex management probably has enough influence to stave off the Broadcom acquisition, "though we expect the shares could trade higher on an increased bid by BRCM near term."