Months of bad blood and publicly traded barbs, some veering into the personal, appear to have doomed any prospect of a deal for Broadcom Corp. and Emulex Corp.
“It got pretty nasty,” said Ross Seymore, an analyst at Deutsche Bank Securities Inc. in San Francisco. “Broadcom walked away, so it’s done. They weren’t bluffing.”
Even with an eleventh-hour rapprochement by Broadcom, the writing was on the wall, according to one analyst.
“I can’t name any hostile takeover bids in the past few years in the semiconductor space that have worked out,” said Dan Morris of Oppenheimer & Co. in Denver.
Morris described the deal as “cantankerous” and characterized relations between the two companies as “acrimonious.”
The emotions, bitterness and personal affronts of the past two months left no room for discussion, according to observers.
Now Broadcom and Emulex are left to address challenges brought up by the drama on their own.
For Costa Mesa-based Emulex, a maker of electronics for data storage networks, that’s proving it can shake off a nearly two-year sluggish performance and live up to promises of big growth ahead.
For Irvine’s Broadcom, it now has to
figure out how to address an emerging market that buying Emulex would have provided entry to.
Last week, Broadcom said it was dropping its bid to acquire Emulex after directors rejected its upped $912 million buyout offer from late June.
The moves ended a public takeover drama that started with Broadcom’s April offer of $764 million, which Emulex rejected on several occasions.
The takeover bid pitted two of the county’s biggest tech names against each other and turned the companies’ top executives,who move in same philanthropic, arts and political circles,hostile toward one another.
Low Point
The low point came in early June, when Emulex filed a lawsuit bringing up the legal woes of Broadcom cofounders Henry Nicholas and Henry Samueli, stemming from an options scandal that was settled in 2007.
Emulex went as far as calling Broadcom a “dishonest enterprise” and brought up charges of drug use and other lurid behavior leveled at Nicholas, who left the company in 2003.
In rejecting Broadcom’s latest offer, Emulex stuck to its script of the past two months: “The offer significantly undervalues Emulex’s long-term prospects, is inadequate and is not in the best interests of Emulex and its stockholders.”
Broadcom’s response sounded like that of a jilted suitor who is moving on.
“Although we were unable to negotiate an expeditious and friendly transaction at a price that makes sense to us given the expectations set by the Emulex board, there are other value-creating alternatives that we will now turn our attention to,” Chief Executive Scott McGregor said in a statement.
The resolution surprised some analysts, who had thought Broadcom’s softened stance and higher bid would have been enough to coax Emulex into talks.
Along with the higher offer, Broadcom said late last month that it was dropping litigation against Emulex and no longer would directly appeal to the company’s shareholders to support a buyout.
The higher offer and new tone was “a basis for getting Emulex to the table,” said Kaushik Roy, senior analyst of data storage technologies at Wedbush Morgan Securities Inc. in San Francisco.
But the moves couldn’t overcome a relationship that had devolved into dueling press releases and no direct contact between the companies.
“There was no interaction between Broadcom and Emulex or any outside advisers after we revised and presented our offer to them,” a Broadcom spokesman said in an
e-mail.
New Technology
The saga centered on a rivalry for customers for a new technology called fibre channel over Ethernet that promises to bridge speedy, specialized data storage networks and everyday networks of servers and desktop computers.
Emulex has staked out an early lead in what are called converged networks with what it says are a slew of undisclosed design wins and product qualifications from big industry players.
Broadcom had sought Emulex’s highly specialized software, which would allow it to offer fibre channel over Ethernet electronics, using its own Ethernet chips.
The company now has to figure out another way to tackle the market.
Broadcom could look to develop the technology on its own, seek another acquisition or attempt to license the technology from someone else.
“There are other companies out there that claim to have converged networking solutions,” said one analyst who follows the company. “There are probably other opportunities they could pursue.”
Either way, the demise of the Emulex deal won’t make or break Broadcom’s networking chip business, according to the analyst.
“I don’t think it hurts Broadcom necessarily,” he said. “As far as fibre channel over Ethernet, it does delay them a little bit. But that market hasn’t really taken off yet.”
Out of Market?
Deutsche Bank’s Seymore said he discounts another acquisition bid.
“It seems like to acquire another company that’s a competitor of Emulex would be an expensive endeavor,the QLogics of the world,” he said. “I would assume that they will go the organic route and build it in-house. That’s the most likely.”
Aliso Viejo-based QLogic Corp. competes with Emulex in electronics for data networks but also has a broader lineup of networking products. It had a market value of $1.5 billion last week.
Emulex’s technology, at best, is “only of modest strategic importance” to Broadcom, Credit Suisse Securities LLC analyst Randy Abrams wrote in a report.
Wall Street responded favorably to Broadcom’s walking away, sending its shares up about 4% on the day of the news. Broadcom had a market value of about $12 billion last week.
“We view the move positively in eliminating a potentially distracting litigious fight,” Abrams said.
Emulex now has an onerous challenge on its hands.
It has to prove to investors that it can grow to be more valuable than what Broadcom was willing to pay for it.
The company’s shares dropped 8% on the day of the news with a recent market value of about $720 million.
For weeks, Emulex has said Broadcom’s bid was an attempt to buy it on the cheap and that its offer undervalued Emulex’s prospects for growth in converged networks.
New Forecast
In a move seen as helping to justify its spurning of Broadcom, Emulex last week narrowed its forecast for the recently ended quarter.
For the three months through June, it expects to report quarterly revenue of $78 million to $79 million, up from $73 million to $80 million projected in April.
The company said it expects earnings before charges near the high end of its prior guidance of $826,000 to $4.1 million.
Analysts, on average, are looking for profits of roughly $3 million on sales of $77 million.
Emulex is set to report results on Aug. 6.
“For Emulex, they’ve put out their targets,” Deutsche Bank’s Seymore said. “Now they have to actually meet them.”
Emulex also said last week it has won contracts with two more undisclosed computer makers for converged networks products.
The design wins “further reinforce the strength of the company’s future prospects,” Chief Executive Jim McCluney said in a statement.
