Emulex to Broadcom: "Take a hike"

May 5, 2009 – As expected, Emulex’s board of directors this week unanimously rejected Broadcom’s hostile, $764 million takeover bid. As I posted previously, the offer was $9.25 per share of Emulex stock.

So far, this only qualifies as a mini-saga, but it could escalate into a mega-saga if (a) it sets off a bidding war for Emulex that involves players even bigger than Broadcom and/or (b) the acquisition bidding spills over into Emulex's competitors, such as QLogic.

At stake is nothing less than the nascent, but potentially game changing, market for converged networks (Ethernet and Fibre Channel), spurred by the overall trend toward data center consolidation.

The buzz on The Street is that Broadcom (or another suitor) will sweeten the pot. Financial analysts have pegged the possible enhanced offer at anywhere from $11 to $15 a share. When Broadcom made the “offer” last week, Emulex stock was trading at about $6 a share. As I write this, it’s trading at $10.76 a share.

In rejecting Broadcom’s bid, Emulex returned the hostility. In a letter to Broadcom CEO Scott McGregor, Emulex’s chairman of the board, Paul Folino, made a number of interesting comments.

For example: “As Broadcom is uniquely aware, Emulex has recently won tier-one [OEM] contracts at the expense of Broadcom and other competitors . . .” Ouch.

(The tier one OEM design wins refer to Emulex’s 10Gbps Ethernet NICs, 10Gbps iSCSI converged network adapters (CNAs), and 10Gbps Fibre Channel over Ethernet (FCoE) CNAs, although the OEMs were not disclosed.)

Another snippet from Folino’s letter to McGregor: “ . . . 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.” Ouch again.

Folino ended the letter with a statement that Broadcom’s $9.25-per-share offer “significantly undervalues our company,” thus apparently leaving the door open for a higher bid. But I don’t know: It sounds like Emulex is hard-set against being acquired, at least by Broadcom.

In response to the rejection from the Emulex board, Broadcom today took its offer directly to Emulex shareholders. See “Broadcom Commences All Cash Tender Offer to Purchase Emulex Shares for $9.25 Per Share” release.

If the Broadcom-Emulex deal fails to go through, financial analysts speculate one or more of the following vendors could emerge as white knights: Cisco, Intel, Juniper Networks, Marvell, or PMC-Sierra. Brocade was also cited.

Financial analysts have speculated that the Broadcom-Emulex battle could start a bidding war that could also put Emulex archrival QLogic into play. (In an irrelevant aside: QLogic was spun off from Emulex in 1994.)

I think it’s safe to say that FCoE has a future.

In tangentially related news, QLogic last week acquired NetXen, which makes Gigabit Ethernet and 10GbE adapters, for about $21 million. The plot thickens.