Costa Mesa-based networking equipment maker Emulex Corp. staved off a proxy battle with its largest shareholder with the appointment of two directors last week.
Hedge fund Elliott Management Corp. late last month pushed Emulex to add two new board members, both of whom have led successful turnarounds and taken companies private, according to informed sources.
Frantz, Clark
The additions of Gene Frantz and Greg Clark take the Emulex board to 11 seats and come with a standstill agreement that prohibits Elliott from engaging in “proxy contest activities” and “proposals for the sale or merger” of Emulex until March 2014 at the earliest, according to a filing with the Securities & Exchange Commission.
Frantz and Clark will sit on the nominating/
corporate governance committee.
• Headquarters: Costa Mesa
• Business: Networking equipment maker
• Founded: 1979
• Ticker symbol: ELX (NYSE)
• Fiscal 2012 revenue: $501.7 million
• Recent earnings: $5.6 million for December quarter
• Market value: About $599 million
• Notable: Added two new directors as part of standstill agreement with largest shareholder
Emulex did not comment on the appointments beyond its SEC filing. The company ranks No. 28 on this week’s Business Journal list of the largest publicly trade companies based in Orange County (list starts on page 10).
Elliott, which has a history of high-profile sales and acquisitions in the technology sector, became Emulex’s largest shareholder in late 2012 after boosting its stake past 11%. The hedge fund joined a chorus of shareholders who oppposed the company’s $120 million buy of New Zealand-based Endace Ltd., a deal that was announced in late February and closed last week.
Endace’s technology is geared to record, visualize and monitor network traffic.
Analysts and investors have questioned the benefits Endace holds for Emulex’s operations.
Elliott deemed the price too steep, according to Rajesh Ghai, an analyst in the Dallas office of Minneapolis-based Craig-Hallum Capital Group LLC. Ghai said the deal ultimately could hurt Emulex’s chances of attracting a private equity buyer.
Other Options
The new board members are likely to seek other options.
“Elliott will potentially use those two board seats to push Emulex to look for strategic alternatives,” Ghai said.
The hedge fund has used that strategy before in Orange County and elsewhere.
Its current deal with Emulex resembles an agreement it struck with Irvine-based Epicor Software Corp. in 2009.
Elliott had tried to acquire the company in a hostile takeover before reaching a standstill agreement. The hedge fund was Epicor’s largest shareholder, with an 18% stake, when it was acquired for $976 million by London-based Apax Partners LLC in May of 2011.
Apax tapped industry veteran and Bay Area-based executive Pervez Qureshi to lead the company, which moved its executive offices to Northern California.
MSC Software
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 made simulation software for aerospace, military and industrial uses, was sold for $372 million to Palo Alto-based private equity firm Symphony Technology Group LLC.
The track record of Frantz and Clark also points to some big changes likely on tap for Emulex, a longtime leader in the maturing fibre-channel networking segment.
Frantz, who’s known as a savvy valuation expert in the industry, was most recently a partner at Fort Worth, Texas-based TPG Capital LP, one of the largest private equity firms in the U.S., with $54.5 billion under management.
Clark is chief executive of Blue Coat Systems Inc. and led the Sunnyvale-based Web security and networking software provider through a private placement in 2011 and a subsequent restructuring. The company was later acquired for $1.3 billion by Thoma Cressey Bravo Inc., a private equity firm in Chicago.
Blue Coat had a standstill agreement with Elliott that was in place before its sale.
The board additions at Emulex come at a precarious time for the company, which has seen its share price slide nearly 35% in the last year to a market value of $598 million.
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.
Ethernet
Both companies are eyeing the 10-gigabit Ethernet connection market, a competitive segment that has drawn big industry players into the fold as storage needs and speedy data transfer become increasingly important with the proliferation of video and streaming content.
Ten-gigabit controllers and adapters connect servers to local area networks within data centers, speeding up the flow of information. Such technology is seen as an improvement over standard fibre-channel and 1-gigabit connections, which are prevalent in data centers today.
San Jose-based Cisco Systems Inc., the world’s largest networking equipment and system maker, and Intel Corp. in Santa Clara, the world’s largest chipmaker, have captured the early lead in the budding Ethernet market.
Intel had a 32% share of $153 million in overall global sales in the segment during the fourth quarter, followed by Cisco (19.6%), Emulex (12.3%), and QLogic (6.9%), according to Redwood City-based researcher Dell’Oro Group Inc.
The arrival of Frantz and Clark should help Emulex attract investors on Wall Street if it can hold off bigger competitors in the Ethernet
segment, according to analyst Andrew Nowinski.
“It gives Emulex a healthy new perspective,” said Nowinski, a vice president and senior research analyst at Minneapolis-based Piper Jaffray Cos. “It’s hard to get people excited about their story.”
