The board at Emulex Corp. has undergone a significant turnover in the past year, replacing nearly half of its 11 seats with new directors who bring executive leadership, operations experience, and deep industry connections to the conference table.
Insiders contend the new mix was needed to position the Costa Mesa-based networking gear maker for long-term viability in emerging business lines forged through innovation and its priciest acquisition to date, which also drew the ire of dissident investors who prompted big changes at the top of the company.
“I think it’s for the good,” said Chief Executive Jeff Benck, who replaced Jim McCluney at the helm last July.
Among the board additions in March prompted by activist investor Elliott Management Corp.:
• Gary Daichendt, a former senior executive at San Jose-based Cisco Systems Inc., the world’s largest networking equipment maker.
• John Kelley, chief executive of Denver-based brain imaging provider CereScan Corp. in Denver.
• Rahul Merchant, chief information and innovation officer for New York City and previously chief information officer at Fannie Mae and Merrill Lynch & Co.
Daichendt, the No. 2 executive at Cisco behind Chief Executive John Chambers during the company’s strongest growth years, understands Emulex’ reliance on original equipment manufacturing customers and on selling to end users.
Emulex designs and makes networking equipment that connects storage, servers and data centers.
It is a leader in the emerging 10-gigabit Ethernet connection market, a competitive segment that’s drawn big industry players as storage needs and speedy data transfer become increasingly important.
New Assets
Daichendt, a former head of Nortel Networks Corp. who also serves on the boards of Sunnyvale-based telecom ShoreTel Inc. and NCR Corp. in Georgia, the market leader in ATM technology, provides Emulex with valuable knowledge on deploying new technologies.
“I’m extremely analytical,” said the mathematician by trade.
And he has “tremendous industry insight,” according to Benck. “He really knows the networking space. He’s just a smart, savvy business executive.”
The trio replaced private investor and consultant Michael Downey, corporate attorney Robert Goon, and tech consultant Don Lyle. Goon had been an independent director since the company’s inception in 1978. Downey and Lyle had been board members since 1994.
The turnover also included the appointment of Bruce Edwards as chairman. Edwards, an Emulex director since 2000, replaced McCluney, who became chairman in July, replacing Paul Folino, who took the role of director.
McCluney oversaw the company’s $130 million acquisition of New Zealand-based Endace Ltd. last year. The buy, one of the largest in the company’s 35-year history, drew questions and criticism on Wall Street because it depleted about 60% of its cash on hand.
McCluney coveted Endace’s technology designed to record, visualize and monitor network traffic. He said at the time that Endace doubled Emulex’ total market potential and placed the company in another “high-margin, high-growth market.”
The emerging segment topped $345.5 million in worldwide sales in 2012, up 22.4% over 2011, according to a report by Frost & Sullivan. The San Antonio-based consultancy forecasts revenue to grow at an annual compound rate of nearly 25% between 2012 and 2020.
Maintaining continuity on the board was important, several board members told the Business Journal.
Edwards, a director at Irvine-based networking equipment maker Lantronix Inc. and chipmaker Semtech Corp. in Camarillo, has led companies through big growth spurts, including Santa Ana-based base station gear maker Powerwave Technologies Inc., which grew sales from $36 million to $700 million under his watch from 1996 to 2005, and Irvine-based computer maker AST Research, which had $2.5 billion in annual sales during its heyday in the early 1990s when he served as chief financial officer.
Edwards said his main job is to look out for shareholders and to help Benck and his management team formulate policy, compensation and other corporate housekeeping duties.
“Our job is to be available when needed,” said the Laguna Hills resident who’s among five locals on the board.
That’s a luxury Benck enjoys, as he frequently meets for coffee and meals with Daichendt, who lives in Laguna Beach, and Coto de Caza resident Folino.
Dean Yoost, who rounds out the local team of directors, is a former partner in charge of the OC office of PricewaterhouseCoopers and serves on the boards of Newport Beach-based Pacific Life Insurance Co., manufacturer Belden Inc. and Union Bank.
Veteran
Folino has ridden more ups and downs at Emulex than anyone. He joined the company in 1993 as chief executive during a major turnaround effort.
The company was reeling from a patent lawsuit it lost against Digital Equipment Corp. that depleted about half of its business.
“I came to reinvent the company,” he said.
Spinning out QLogic Corp. in Aliso Viejo was one of his first initiatives.
He’s also watched the influence of activist investors play out in the filling of other board positions, most notably at Irvine-based real estate and mortgage data provider CoreLogic Inc., which underwent a similar turnover prompted by dissidents in 2012.
Folino was part of the interview committee that vetted potential Emulex board candidates with Elliott, which pushed its stake in Emulex past 11% in late 2012, becoming the company’s largest investor. The group narrowed the finalists from about 12 candidates to three.
“All three of those candidates are outstanding additions to the board. All come in with strong backgrounds,” Folino said. “Sometimes you need to make a paradigm shift within the company. We have some good core base businesses, and now we just have to focus on taking it to the next level.”
The recent shake-up followed the appointments of Gene Frantz and Greg Clark about a year ago, hand-picked by Elliott.
Hand-Picked
Frantz, who’s known as a savvy valuation expert in the industry, was most recently a partner at Fort Worth, Texas-based TPG Capital LP, one of the largest private equity firms in the U.S., with $54.5 billion under management.
Clark is chief executive of Blue Coat Systems Inc. and led the Sunnyvale-based Web security and networking software provider through a private placement in 2011 and a subsequent restructuring. The company was later acquired for $1.3 billion by Thoma Cressey Bravo Inc., a private equity firm in Chicago.
Benck said he believes the board is better rounded today and provides Emulex with some needed stability as it embarks on its next chapter.
“We wanted to bring in some operating guys with operations experience,” he said, and “we wanted tech relevance.”
