The new chief executive of networking gear maker Emulex Corp. has placed a high priority on integrating a recent acquisition that his predecessor pushed and investors criticized.
Jeff Benck moved up from president to the chief executive’s post last week and immediately began ramping up sales and marketing efforts for a line of server monitoring products Costa Mesa-based Emulex got in a deal earlier this year.
The company designs and makes networking equipment that connects storage, servers and data centers. Benck said he sees the products, which feature technology designed to record, visualize and monitor network traffic, as a key market for Emulex.
“That business line is a new growth engine for the company,” he said. “We’ve been making connections in the server, and now we can monitor those connections in the data center.”
The technology was coveted by former Chief Executive Jim McCluney, who led Emulex on a $130 million buy of New Zealand-based Endace Ltd. in February.
Dissident shareholders and some Wall Street analysts have questioned the buy and criticized its terms—Emulex used about 60% of its cash on hand for one of the largest acquisitions in its 34-year history.
New York-based Altai Capital, which owns about 5.3% of Emulex, called the deal “perplexing” at the time and urged the company to consider a sale or changes to its board.
New York hedge fund Elliott Management Corp. joined the chorus of shareholders in opposition.
Elliott, which has a history of big sales and acquisitions in the technology sector, became Emulex’s largest shareholder late last year after boosting its stake past 11%.
Its complaints prompted Emulex in April to place two of the hedge fund’s nominees on the company’s board, staving off a proxy battle with its largest investor.
The additions of Gene Frantz and Greg Clark, both of whom led successful turnarounds and took companies private, came with a standstill agreement that prohibits Elliott from engaging in “proxy contest activities” and “proposals for the sale or merger” of Emulex until March at the earliest.
Endace Potential
The network recording market, which includes monitoring products such as Endace’s, is pegged for big growth this decade. The emerging segment topped $345.5 million in sales in 2012, up 22.4% from 2011, according to a report by Frost & Sullivan. The San Antonio-based consultancy forecasts revenue to grow at an annual compound rate of nearly 25% between 2012 and 2020.
It bears watching if Emulex can convince customers to choose Endace’s technology over others in an era of increasing security threats, demand for peak server performance, and the growth of cloud computing.
“People want more and more visibility,” Benck said, referring to the technology’s benefits.
McCluney, who had been chief executive since 2006, takes over as executive chairman of the board. Benck said he will count on McCluney as a close adviser in his new role.
Paul Folino, who preceded McCluney as chief executive at Emulex and is one of the best-known tech executives in Orange County, stepped down as executive chairman. Folino will remain a director.
The changes come on the heels of recent public disputes with dissident shareholders and escalating chatter that the company is on the sales block.
“I don’t like the rumors and the noise,” Benck said. “But the team has been through a lot … and we’ve overcome everything that’s been thrown in our path.”
Emulex has long been a leader in the fibre-channel market, along with Aliso Viejo-based rival QLogic Corp., but that segment is generally considered in long-term decline.
Both companies are eyeing the 10-gigabit Ethernet connection market, a competitive segment that has drawn big industry players as storage needs and speedy data transfer become increasingly important with the proliferation of video and streaming content.
“We’ve been investing for success there,” said Benck, who served as president and chief operating officer of QLogic before joining Emulex in May 2008 (see related OC Insider item, page 3).
So far, it’s paying off, as the company held the No. 2 position in the first quarter, selling more than 306,000 ports, according to Redwood City-based researcher Dell’Oro Group Inc. Its 17.7% market share was far behind leader Intel Corp.’s 46.6%.
“We’ve been able to maintain a really important position in the market,” Benck said. “I think we’ve demonstrated we’re going to be one of the guys who succeed in this.”
Street’s View
Wall Street has largely approved of Emulex’s succession plan, but it’s not seen as a game-changer.
“We view this announcement largely as a nonevent, especially as the trajectory of the stock is now being dominated by widely publicized media reports that the company is looking for a sale,” Edward Parker, an analyst at New York-based Lazard Capital Markets, wrote in a note to investors.
Emulex shares have jumped nearly 34% in the past three months, riding a wave of strong gains in the stock market and investor “anticipation of more significant changes,” according to Andrew Nowinski, a vice president and senior research analyst at Minneapolis-based Piper Jaffray Cos.
“We believe shares are pricing in the potential for an activist-driven acquisition,” he said.
The Business Journal in June reported that the company hired Goldman Sachs to seek a potential sale.
