Emulex Corp. Chief Executive Jeff Benck will get a shot at turning around the networking equipment maker after getting a nod from activist investors that eluded his predecessor.
Benck was president and chief operating officer before being tapped in July to replace Jim McCluney at the day-to-day helm. Now he’s in charge of getting Emulex back on track after several years of sputtering.
His path to putting the company back in black will focus on winding down nonperforming business lines; easing investment on maturing segments, such as fibre-channel connections; and expanding market share for its emerging 10-gigabit Ethernet products and network monitoring technology acquired in a deal that raised hackles on Wall Street earlier this year.
The road is littered with obstacles for Emulex, which faces big-name competitors such as Intel Corp. the 10-gig Ethernet market and ongoing litigation with Irvine-based chipmaker Broadcom Corp. The activist investors who pushed McCluney out appear willing to give Benck a year or so on a turnaround, but patience has grown thin for a company that last posted an annual profit in 2010.
Emulex has lost more than $93 million since then over three fiscal years.
“When I stepped in, I told the employment base, ‘You’re going to see a rapid amount of change,”’ Benck said from his second floor office at Emulex’s glass-encased headquarters in Costa Mesa. “I didn’t stipulate what that would be.”
Investors and company watchers got more clarity last week when the company announced a restructuring, a share buyback program and sweeping changes to its board that included the ouster of McCluney, who took over the executive chairman position from Paul Folino as part of a cascade of leadership changes four months ago.
Elliot’s OC History
The latest developments were pushed by Emulex’s largest investor, New York-based hedge fund Elliott Management Corp., which has shaken up the technology landscape in Orange County before.
Elliott, which has a nearly 10% stake in the company, was a vocal critic of Emulex’s management and opposed its $120 million buy this year of New Zealand-based Endace Ltd., which makes technology that records, visualizes and monitors network traffic.
The takeover depleted about 75% of Emulex’s cash balance at the time in one of the largest acquisitions in its 34-year history, and some industry watchers questioned its strategic benefits.
Elliott has a history of big sales and acquisitions in the technology sector. The hedge fund was Irvine-based Epicor Software Corp.’s largest shareholder when Epicor was acquired for $976 million by London-based Apax Partners LLC in May 2011. The company later moved headquarters to Northern California but still maintains a sizable presence here.
The hedge fund held onto Epicor for several years, improving its operations and leadership team before pushing for an exit.
Elliott held a 13% stake in Santa Ana-based MSC Software Corp. in 2008 when it pushed the company to “explore strategic alternatives.”
MSC, which makes simulation software for aerospace, military and industrial uses, was sold for $372 million to Palo Alto-based private equity firm Symphony Technology Group LLC.
McCluney’s employment at Emulex, which began in 2006, will end Feb. 6, and he “will not stand for reelection” as a director when his current board term concludes, the company said.
Emulex will replace three board members at its annual shareholder meeting in February, ceding more power to Elliott and other activist shareholders, including hedge fund Starboard Value LP, which controls a 7.7% stake, and Altai Capital Management LP, which owns nearly 6%.
“We did collaborate with Elliott as part of a potential list of candidates,” Benck said. “The guys with a bigger position have more influence and can have more influence on the board.”
Proxy Threat
Emulex in April staved off a proxy battle with Elliott through the appointment of two directors, but it wasn’t enough for a growing number of frustrated investors who pushed for more changes.
Its old guard of directors, which include investor Michael Downey, attorney Robert Goon and tech consultant Don Lyle, also will step down. Goon has been an independent director since the company’s inception in 1979. Downey and Lyle have been board members since 1994.
Folino, who stepped down from his role as executive chairman to serve as a director, is expected to be renominated.
Benck said he’s looking for some financial experts to sit on the audit committee and is exploring the addition of former or current chief executives.
“Having some technology experience is important to me,” he said.
The board will shrink from 12 directors to 11 when all of the changes are complete.
More Cuts
Benck said he’s seeking to cut an additional $20 million in expenses over the next few quarters. The latest cost-cutting initiative follows a $10 million restructuring concluded in the September quarter that shed more than 60 employees, or roughly 5% of its 1,200 workers through June, the end of its fiscal year.
Emulex employed 363 people in Orange County through September, down about 20 from a year earlier.
Despite the job cuts, Emulex’s total employment is up about 200 from a year ago, thanks in large part to the Endace buy.
Benck hasn’t ruled out more job cuts as Emulex strives to regain profitability.
Benck said he’s also looking to cut capital-goods costs as the company invests substantially in servers and other hardware used to design and test its networking equipment that connects storage servers and data centers.
“Instead of buying 100 servers, how do we do it with 75?” he said. “I’m challenging the team to be creative. The opportunities are big enough, we feel pretty confident we can get an incremental $20 million.”
The company plans to provide updates on the restructuring in its upcoming quarterly reports.
Emulex has received plenty of attention this year as rumors circulate of a possible sale and executive ranks continue to change.
CFO
Benck is still searching for a new chief financial officer to replace Michael Rockenbach, who will depart at the end of the year. Rockenbach was “controversial among investors and a lightning rod for some investors’ frustration,” according to Glenn Hanus, an analyst at Needham & Co.
“I just think there’s an interesting story here developing, and that’s what causing a lot of attention,” Benck said. “A lot of people see that Emulex is alive and kicking, and there’s more to come from us.”
