Emulex Corp. and its largest investor have extended a stand still agreement to Oct. 20, delaying a proxy battle with New York-based hedge fund Elliott Management Corp. as Wall Street speculates about a possible sale of the networking gear maker.
“We believe the repeated extensions suggest a potential M&A deal could be in the works, as Elliott would not push forward with a more aggressive agenda that would disrupt negotiations,” Andrew J. Nowinski, senior research analyst at Piper Jaffray Cos., wrote in a note to investors.
The development comes on the heels of an announcement that Chief Financial Officer Michael Rockenbach will depart Costa Mesa-based Emulex.
Rockenbach was “controversial among investors and a lightning rod for some investors’ frustration,” according to Glenn Hanus, an analyst at Needham & Co.
The move by Emulex to extend its standstill agreement with Elliott for a second time came as another New York-based hedge fund, Starboard Value LP, called for the resignation of Chairman Jim McCluney and eight other members of the company’s 11-seat board.
Starboard Value made its request in a letter last week to Emulex Chief Executive Jeff Benck, who succeeded McCluney in the top day-to-day post in July. The letter outlined several complaints about the company’s financial performance, cost structure, strategy and leadership.
“Emulex is extremely undervalued,” and “specific changes must be made to address years of dismal operating and share price performance as well as sub-optimal corporate governance,” the letter stated.
An Emulex spokesperson declined to comment on the letter.
The company’s shares are up 2.2% in the last year to a market value of about $729 million. They’re down by 36.4% over the past five years.
The tech-heavy Nasdaq has risen by 17.9% in the last year and 64.7% in the last five years.
Starboard, which owns about 7.9% of Emulex’ outstanding stock, also criticized the company’s investments over the last decade, contending that $2.4 billion spent on acquisitions and research development hasn’t produced sufficient returns.
“The most recent example of this is the poorly timed acquisition of Endace,” the letter said. “We question the strategic logic and the timing behind the acquisition.”
The $130 million buy of New Zealand-based Endace Ltd.—which develops products that record, visualize and monitor network traffic—came in February and drew the ire of other Emulex investors while puzzling some analysts.
New York-based Altai Capital, which owns about 6% of Emulex, called the deal “perplexing” and urged the company to consider a sale or stock repurchase in a letter sent to McCluney.
Altai Chief Executive Rishi Bajaj said the company should add board members with a “greater economic stake” in Emulex. Bajaj was particularly critical of the cash-heavy nature of the Endace deal, which represented about 75% of Emulex’ cash balance at the time of the acquisition.
Emulex designs and makes networking equipment that connects storage, servers and data centers.
It has long been a leader in the fibre-channel market, along with Aliso Viejo-based rival QLogic Corp., but that segment is generally considered to be 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 transfers become increasingly important with the proliferation of video and streaming content.
Elliott Management
Emulex spent much of the first half of this year holding off proxy battles, reaching its second extension on a standstill agreement with Elliott Management Corp. that was set to expire Sept. 20, but was extended a month ago, according to filings with the Securities and Exchange Commission.
In July the company announced several management changes that included the promotion of Benck to chief executive.
Benck, who held the titles of president and chief operating officer, replaced McCluney, who was named executive chairman of the board. One-time Chief Executive Paul Folino stepped down from his role as executive chairman and remains a director.
Pressure
Emulex contended at the time that a succession plan had long been in place, suggesting the move wasn’t prompted by pressure from investors.
The pressure has ratcheted up since then and now includes a second shareholder, Starboard, which has a history of pushing acquisitions and board changes in public companies.
Starboard is currently entangled in a proxy battle with Boca Raton, Fla.-based Office Depot Inc. and is seeking four seats on the company’s board before its pending $1.17 billion merger with Naperville, Ill.-based OfficeMax Inc., which has muddied the ongoing search for a new chief executive to lead the combined companies.
Starboard owns about 14.6% of Office Depot stock.
The hedge fund has also challenged China-based Shuanghui International Holdings Ltd.’s proposed $4.7 billion buy of Smithfield Foods in Virginia, contending it has found interested bidders willing to pay more for the world’s largest pork producer.
Starboard has a 5.7% stake in Smithfield.
Emulex has long been seen as a takeover target by industry watchers.
Irvine-based chipmaker Broadcom Corp. tried to buy Emulex for $764 million in 2009, but its hostile bid was rejected.
Broadcom’s all-cash offer of $11 per share is about 28% higher than Emulex’ recent share price.
Starboard Value hasn’t offered any specifics on steps it will consider if Emulex refuses its request for a new board majority.
