Directors of Costa Mesa-based Emulex Corp. on Monday rejected a $764 million buyout bid from Broadcom Corp., setting the stage for the Irvine chipmaker to up the ante or walk away.
Emulex’s board unanimously rejected the offer for the second time, calling it an opportunistic move that undervalues the maker of electronics for data storage networks.
Broadcom’s offer is aimed at getting business with makers of data storage computers that the company lost to Emulex, according to Emulex Chief Executive Jim McCluney.
“We felt it significantly undervalues Emulex’s long-term prospects,” he said. “It was pretty opportunistic given that Broadcom is aware of many unannounced design wins that Emulex has already secured, we believe, at the expense of Broadcom and other competitors. We think Broadcom is trying to take advantage of Emulex’s depressed stock price.”
Broadcom went public with its offer last month after being rebuffed in private by Emulex a few months earlier.
Broadcom Chief Executive Scott McGregor initially approached Emulex Executive Chairman Paul Folino back in December.
“It kind of came out of the blue,” McCluney said. “He expressed a general interest in the combination, but there were no terms presented at all.”
Broadcom’s bid, which was made public on April 21, is worth 40% more than Emulex was valued at before the bid became known.
Folino said the bid seeks to “capture substantial current and long-term value that properly belongs to Emulex stockholders.”
Emulex is banking on being a big player in the market for a new technology, called fibre channel over Ethernet, that’s set to combine data storage networks with the cheaper, everyday networks.
“Our opportunities in network convergence are set to more than double Emulex’s addressable market,” McCluney said. “We believe we are positioned to create significant value in this converged network market.”
McCluney pointed to several unannounced design wins Emulex has landed with makers of servers and data storage networks as validation in the new market.
“We see this providing meaningful revenue from those products and design wins through 2010 and beyond,” he said. “These are multiyear, multiplatform and multimillion dollar wins.”
The ball now is in Broadcom’s court. Analysts expect it 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 the offer became public.
The company had a market value of about $835 million at Friday’s close, as investors have 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 (Broadcom) management too much or cost more than $1 billion to consummate,” Berger said in a research note.
There’s also a chance other suitors could emerge, according to analysts.
Intel Corp., Marvell Technology Group Ltd. and PMC-Sierra Inc. also could bid for Emulex, they say.
Broadcom makes chips for servers, networking gear, consumer electronics and wireless phones.
The company wants Emulex to build on its business supplying chips for computers that serve up data on networks for companies, governments and other users.
The offer for Emulex has sent waves through the county’s technology industry as it involves two of the sector’s biggest companies and most well known executives.
