Things are starting to get nasty in Broadcom Corp.’s bid for Emulex Corp.
Irvine-based chipmaker Broadcom said last week it’s taking its rebuffed $764 million offer for Emulex directly to shareholders of the Costa Mesa-based company.
What first was described as amicable, behind the scenes talks among executives at Broadcom and Emulex have given way to publicly traded barbs and charges of misrepresentation, hidden motives and intransigence.
Paul Folino, Emulex’s executive chairman, minced few words, calling Broadcom’s offer “an opportunistic attempt by Broadcom to capture substantial current and long-term value that properly belongs to Emulex stockholders.”
When Emulex Chief Executive Jim McCluney made the media rounds last week, his talking point was that Broadcom is trying to take advantage of Emulex’s fallen stock price and make up for business it lost in competition with Emulex.
“There is more to this than meets the eye,” he told the Business Journal. “I think Broadcom is uniquely aware of these unannounced (Emulex) wins. These are multiyear, multiplatform and multimillion dollar wins.”
Emulex isn’t saying who the wins are with.
Broadcom’s response?
Emulex “has failed to demonstrate an ability to convert design wins into either revenue growth or market share,” the company said in a statement.
In a letter to Emulex’s stockholders, Broadcom Chief Executive Scott McGregor pointed to Emulex’s deteriorating value, including declining sales and shrinking profits in the past year or so.
He also brought up Emulex’s lost market share to QLogic Corp. of Aliso Viejo for a profitable bit of electronics that speed up the flow of data on special data networks.
“Over the last several years, including this most recent quarter, Emulex has continued to lose share to its larger competitor,” McGregor said.
He characterized Emulex’s board’s rejection of Broadcom’s offer and its unwillingness to negotiate as “intransigence.”
At the heart of the war of words is a battle over the next generation of computer networks.
Up to now, Broadcom and Emulex have co-existed in the computer networking world and haven’t directly faced off with each other.
Broadcom makes chips for servers and routers that speed data on networks. (It also makes chips for consumer electronics, wireless phones and desktop computers.)
Emulex makes chips and circuit boards for specialized banks of computers that store and quickly serve up data to corporations, banks, governments and others.
So a data storage computer with an Emulex circuit board could end up sending information to a server with a Broadcom chip, which then would deliver the data to someone’s desktop computer.
But now the faster, special data networks of Emulex’s world are expected to converge with the everyday networks of Broadcom’s with a technology known as fibre channel over Ethernet.
Early Decisions
Some server makers could be bypassing the fastest Ethernet networking cards with Broadcom chips in favor of fibre channel networking cards from Emulex, knowing that the two types of networks are expected to converge.
“As we had feared in learning of the acquisition, the move by Broadcom appears at least in part to be motivated by plugging a potential revenue hole in the story,” said Alex Gauna, an analyst at JMP Securities LLC in San Francisco. “It looks to me that Emulex is a step ahead in terms of competition. Industry sources disclosed to us that Broadcom is losing (Ethernet) design wins to Emulex.”
There’s another twist.
For Emulex’s circuit boards for converged networks, it is using chips from a Broadcom rival, Sunnyvale-based ServerEngines Corp.
ServerEngines was founded in 2004 by former Broadcom engineers who came to the chipmaker when it bought Silicon Valley’s ServerWorks for $1.8 billion in 2001.
ServerWorks founder Raju Vegesna left Broadcom in 2003 over what the company called “operational issues and the strategic direction.”
Broadcom needs Emulex to shore up its business making networking chips, according to Gauna.
“This development puts Broadcom in a messy bind where it will either need to up its bid or face uncomfortable questions regarding its roadmap now brought to the light of day by Emulex,” he said. “We believe Broadcom will have no choice but to up its bid.”
Higher Offer?
Most other observers believe Broadcom will have to up its offer, with some predicting a deal in the range of $900 million to $975 million.
Emulex had a market value of about $865 million last week, as investors have bid up the stock beyond Broadcom’s offer on speculation that a higher bid could come.
Broadcom’s offer was worth 40% more than what Emulex was valued at before the bid became known. Emulex’s shares were down by half in the 12 months before Broadcom’s offer became public.
For now, Broadcom is taking its offer, first disclosed in April, to Emulex’s largest shareholders. Broadcom hopes to have shareholders convene a special meeting to consider its offer.
“While we much prefer to arrive at a negotiated agreement with Emulex, the Emulex board has left us with no choice but to ask Emulex stockholders to call for a special meeting so that they can consider the merits of our offer for themselves,” McGregor said.
Emulex’s largest shareholders are Boston-based Wellington Management Co. (at about 6%), Pasadena’s Primecap Management Co. (6%) and New York’s AXA Financial Inc., part of France’s AXA (5%). They and several other Emulex shareholders declined to comment for this story.
The escalating buyout fight may have scared off other potential Emulex acquirers, which some analysts had speculated might enter the fray.
“Because the Emulex position is uniquely threatening to Broadcom, we do not see other industry players being motivated to come in over the top to make a more aggressive bid,” Gauna said. “These assets mean something to Broadcom, far more than anyone else. It comes down to figuring out what Broadcom’s appetite is to chase the thing.”
