Broadcom Corp. may have to up the ante for Emulex Corp., according to analysts.
Last week, Irvine-based Broadcom went public with a $764 million offer for Emulex, which the Costa Mesa maker of electronics for data storage networks rejected in December.
The bid was worth 40% more than what Emulex was trading at before news of the offer broke. Even so, Emulex,like a homeowner who still remembers what his house used to be worth,may be reluctant to sell at what it considers to be a discount.
Most industry watchers agree Broadcom will have to pony up more money to entice Emulex to the negotiating table.
“While the offer is reasonable, the key is Emulex’s board accepting it, which may require more negotiations and a higher bid,” said Randy Abrams, an analyst at Credit Suisse Securities LLC in New York.
Emulex’s stock was off 50% for the past 12 months before surging last week. The company had a market value of about $850 million last week, after investors bid up the stock beyond Broadcom’s offer on speculation that a higher bid could come.
Shares of Emulex peaked in early 2001 when the company had a market value of more than $6 billion.
FBR Capital Markets & Co. analyst Craig Berger said he doesn’t think a deal will happen for less than $910 million, with $990 million being the high end.
“We view this acquisition positively, assuming it does not distract management too much or cost more than $1 billion to consummate,” Berger said in a research note.
Emulex might hold out to see if other players enter the bidding.
Intel Corp., Marvell Technology Group Ltd. and PMC-Sierra Inc. also could bid for Emulex, speculated Kaushik Roy, senior analyst of data storage technologies at Wedbush Morgan Securities Inc. in San Francisco.
“The more players, the bigger the price war,” he said.
Broadcom now is in a waiting game, said Ross Seymore, managing director of chip research at Deutsche Bank Securities Inc. in San Francisco.
Chief Executive Scott McGregor said he first approached Emulex Executive Chairman Paul Folino in December. Emulex’s board rebuffed the overture.
According to Broadcom, Emulex then strengthened its anti-takeover provisions to thwart a buyout.
Broadcom, in turn, is suing Emulex to have the new provisions declared invalid without the majority consent of Emulex’s shareholders.
“Our strong preference is that this becomes an amicable deal,” McGregor said.
He’s said he’s counting on a cordial relationship with local technology veteran Folino to help keep the deal negotiations friendly.
Hostile buyout bids are pretty uncommon among chipmakers, analyst Seymore said.
“Successful hostile bids are extremely rare,” he said. “Goodwill is important when the assets you want to acquire are engineers. You want to create an environment such that they will want to work for you.”
A deal with Emulex would push Broadcom in the market for chips and circuit boards that link computers serving up data for corporations, banks and others. It also would give it a leg up on an emerging technology.
The chipmaker likely is looking to improve profits in its enterprise business, which sees slower growth than its consumer side.
Broadcom’s enterprise business,direct sales to networking gear and server makers such as Cisco Systems Inc.,makes up about a quarter of its $3.6 billion in yearly revenue.
“The surprise bid brings into focus the lack of growth in Broadcom’s enterprise networking segment over the last five years,” said Rick Schafer, an Oppenheimer & Co. analyst in New York.
Shaking Up Market
The deal has bigger implications for Orange County’s tech industry.
It involves some of the best-known tech personalities in the area, including Broadcom’s McGregor and cofounder Henry Samueli and Emulex’s Folino and Chief Executive Jim McCluney.
And a deal would shake up the longstanding rivalry between Emulex and Aliso Viejo-based QLogic Corp., which spun off from Emulex in 1994.
Emulex and QLogic dominate the market for what are known as host bus adapters, profitable electronics that link computers serving up data on a network.
Broadcom’s bid is driven by an emerging market for Emulex and QLogic: chips and circuit boards that bridge faster, specialized data networks with cheaper, everyday networks of servers and desktop computers.
QLogic and Emulex are angling for early design wins for the technology, known as fibre channel over Ethernet. The technology is expected to start taking hold in the next few years.
“Broadcom is looking to combine Emulex expertise in storage networking and particularly in fibre channel with its own expertise in Ethernet networking,” said Credit Suisse analyst Abrams. “The combination is aimed at delivering a one-stop-shop for enterprise networking as customers look to transition” to converged networks.
An Emulex buy would build on the company’s business making chips for servers, routers and other networking gear.
“We see this as an opportunity based on where customers are in their planning cycles and where we see the technologies we want to deploy,” McGregor said. “We have some fibre channel efforts and have done a fair amount of investment already. We believe a deal would greatly accelerate our ability to deploy fibre channel solutions for our customers.”
Both Emulex and QLogic have something Ethernet players want,fibre channel technology that’s already been vetted by industry heavies such as EMC Corp. and IBM Corp.
“What Broadcom wants is the fibre channel (chip) stack,” analyst Roy said. “They could build their own, but server manufacturers won’t qualify it and they will fall behind. They need the credibility of an established fibre channel player.”
It’s considerably more difficult to build fibre channel technology than to buy it, which is why both QLogic and Emulex have had such a lock on the market, according to Roy.
“Fibre channel is still seen as a voodoo technology,” he said. “It’s very difficult to pull off product-wise and it needs a lot of hand-holding.”
QLogic Target?
McGregor declined to say whether QLogic was in the running for a potential buyout.
“We certainly looked at other opportunities, but our focus was on Emulex,” McGregor said. “We believe that where they are with their product cycle is the best fit for us.”
QLogic might not have been a good target because of its product lineup of fibre channel switches.
“They could have bid for QLogic, too, but they’d get a lot of extra products on the switching side that they might not want,” Roy said.
QLogic, with a recent market value of about $1.7 billion and about $663 million in yearly sales, would have also commanded a much steeper premium than Emulex, he said.
An Emulex deal makes sense from an employee perspective, given that the two companies are practically neighbors.
It remains to be seen if it’s a good cultural fit,Emulex is perceived as a more stable player, compared to Broadcom’s aggressive, highly diversified worldview.
“It’s probably a good thing that some aggressive company buys Emulex because they can make better use of their technologies,” Roy said.
McGregor anticipates a “smooth transition” if a deal were to go through.
“There is a people side to this that’s really important,” he said. “Our headquarters are just about seven miles apart. For an Emulex employee, this is the opportunity of a lifetime to join Broadcom.”
