Broadcom Corp. and Emulex Corp. appear to have reached an impasse in their bitter takeover battle.
In April, the Irvine-based chipmaker launched a hostile bid to buy the Costa Mesa-based maker of electronics for data storage networks for $764 million.
Emulex has tried to fend of Broadcom’s relentless attempts to reach out to shareholders despite repeated rejections of a deal by Emulex directors.
The fighting has spilled over into a series of legal spats,there are three lawsuits at latest count,and attacks on each other in the public eye.
As it stands, the battle now has shifted to Emulex’s shareholders.
Broadcom is seeking what’s called a “consent solicitation,” in which Emulex shareholders give the green light to call a special meeting to discuss the buyout bid and other proposals that would change Emulex’s bylaws to be more favorable to Broadcom.
Emulex has its own shareholder solicitation to gauge shareholder sentiment.
Both companies now are in a waiting game until they hear from Emulex’s shareholders via signed cards returned in the mail. There’s a 60-day deadline once the cards are sent out.
Broadcom needs more than 67% of shareholders to give consent to a meeting in order to proceed. That number could drop to 50% if Broadcom succeeds in winning a Delaware lawsuit against Emulex.
Some say Broadcom’s interest in changing Emulex’s boardroom bylaws could prove to be a big sticking point.
“We believe they have every intention of replacing the board to put in place representatives who would be supportive of Broadcom,” said Jeff Benck, Emulex’s chief operating officer. “We are saying, ‘Look, don’t put the advantage in Broadcom’s hands by agreeing to the consent solicitation.'”
Broadcom has said that its consent cards are merely an indication that shareholders are willing to agree to a meeting, nothing more.
One source who tracks Broadcom speculated that Emulex’s management would be willing to come to the bargaining table if Emulex’s shareholders approved a meeting.
The game changed a bit last week, when Broadcom for the first time raised the issue of walking away from Emulex amid management’s resistance.
It marked a turning point in the saga, which centers on a rivalry for customers for a new technology that promises to speed up everyday networks of servers and desktop computers, called fibre channel over Ethernet.
Emulex Chief Executive Jim McCluney has been touting the company’s design wins, future revenue projections and position in the nascent fibre channel over Ethernet market as the main reason for Broadcom’s aggressive move for a buyout.
Broadcom has taken digs at Emulex’s projections for future sales growth for the new technology and pointed out its poor performance in recent quarters.
Emulex recently went beyond the numbers and got fairly personal in a lawsuit where it called out the legal troubles of Broadcom’s founders and its recent options backdating mess.
Other Options
If Broadcom isn’t bluffing, the threat of walking away opens up another can of worms for the communications chipmaker.
Broadcom has enjoyed the top market share for 10 gigabit Ethernet chips, the standard on most computer networks. But it’s lacking the highly specialized software that would allow it to run the fibre channel over Ethernet wires.
Industry watchers say it could opt to build the technology itself, look for another potential acquisition target or license the technology it needs.
A spokesperson for Broadcom declined to comment for this story.
“I think Broadcom can develop it organically,” said Ross Seymore, an analyst at Deutsche Bank Securities Inc. in San Francisco. “However, the time to market may take longer and they need to be prudent right now on how they spend their capital. ”
Emulex, meanwhile, maintains that Broadcom’s offer is “inadequate” and “opportunistic.”
Emulex hasn’t hinted if it would be open to a higher bid and has stuck to its party line that the board “has a responsibility to take seriously and review any offers.”
Industry watchers say Broadcom will have to up its offer to lure Emulex to the negotiating table. Its current offer is set to expire on Wednesday.
“It wouldn’t surprise me at all if Broadcom walks away from it,” analyst Seymore said. “If they want it bad enough they will really have to pay up.”
A source who tracks Emulex said its current stock price speaks to what shareholders feel about the offer.
Emulex’s shares are up 70% since the offer was made public on a recent market value of about $925 million.
In a filing with the Securities and Exchange Commission, Broadcom last week disclosed that it wanted to get a better look at Emulex’s books to perhaps justify raising its offer.
An e-mail exchange showed that on June 5, Broadcom Chief Executive Scott McGregor asked McCluney for a look at Emulex’s financials.
McCluney shot down the request a few days later and said Emulex wasn’t willing to divulge “highly competitive and sensitive information regarding our technology, details of customer plans, design wins and financial plans.”
Emulex’s Benck echoed McCluney: “For us to go share confidential details in the face of an inadequate offer would be derelict of our responsibilities to stockholders,” he said.
Later that day, McGregor again plied McCluney for more information and to “open a channel of communication” and asked Emulex to prove it was worth more than $764 million.
“We are open to discussing all terms of a potential transaction … if Emulex is willing to share its perspective and information that could prompt us to take a different view on transaction terms,” he said. “If Emulex can justify a valuation that is not ascertainable from public information, we would consider it.”
McGregor again pushed for talks with management.
“We recognize that jointly negotiating a transaction would not only be a more efficient use of time and resources for both of us but also an effective way to ensure a smooth and seamless transition,” he said. “We think that your shareholders would agree and would prefer for you to negotiate a transaction with us rather than continuing to delay.”
Some industry watchers are left wondering whether a deal is even possible with all of the acrimony in the air.
There’s doubt as to whether a smooth integration of Emulex’s workers would even be possible after the dust settles.
“Broadcom’s approach is strange,” said a source following the companies. “With tech companies, you’ve got engineers who want to work in a great environment and work on innovative designs and they want to win in the marketplace. I’m surprised that they’ve come from such a hostile approach.”
Hostile bids within the chip industry “have rarely worked,” analyst Seymore said.
“The talent you are buying walks in and out of the door every day,and they are a primary asset,” he said. “You have to make sure to keep them happy if you want them to be part of your company.”
Emulex’s Benck said all of the back and forth “hasn’t really been a big distraction” to Emulex’s workers.
“If anything, they look at all this and see that it puts a spotlight on the kind of work they are doing and that we are working on things that are really relevant,” he said. “The parking lot is full at 7 p.m. every night.”
