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Emulex rejects Broadcom takeover offer, again

May 4, 2009 | 10:33 am
Scott McGregor
Broadcom Chief Executive Scott McGregor launched a hostile bid for Emulex after being rejected in December. Credit: Gina Ferazzi / Los Angeles Times

Emulex's board this morning formally rejected an unsolicited buyout offer from its Orange County neighbor, chip maker Broadcom, saying the $764-million cash offer was "opportunistic." The Costa Mesa networking equipment company said the bid "significantly undervalues Emulex and is not in the best interest of Emulex stockholders."

Irvine-based Broadcom lobbed the hostile bid on April 21, four months after being quietly rejected by Emulex's board. Broadcom makes, among other things, networking equipment that connects high-powered servers, while Emulex's chips connect storage disks containing massive amounts of data, called fibre channel storage. Scott McGregor, Broadcom's chief executive, said the two companies could combine their technologies to create equipment that can do both interchangeably, entering a market segment called "converged networking."

But Emulex sent a strong signal during its third-quarter earnings call last week that it intended to tackle that market without Broadcom. "Emulex has made the transition from a fibre channel storage company to a converged networking company," Emulex Chief Operating Officer Jeff Benck said. "We have a winning strategy. We are executing that strategy. And we are building a next-generation network convergence company."

Many analysts had expected Emulex to reject the $9.25-a-share bid because its shares, which closed at $6.61 a share the day before Broadcom launched its bid, had traded close to $14 a year earlier.

Emulex shares were trading up nearly 3% this morning, at $10.67. Broadcom was up more than 2%, at $23.59.

Glenn Hanus, an analyst with Needham & Co., called Broadcom's offer "credible but opportunistic," saying that the bid could put Emulex in play. "We believe that there could potentially be other interested partners," he wrote in a note to investors.

Read the full text of the letter to McGregor from Emulex Executive Chairman Paul Folino, after the jump.

-- Alex Pham

May 4, 2009

The Board of Directors of Broadcom Corporation
c/o Scott McGregor, Chief Executive Officer
Broadcom Corporation
5300 California Avenue
Irvine, California  92617

Mr. McGregor,

We received your unsolicited, non-binding proposal to acquire Emulex for $9.25 per share in cash on April 21, 2009 and have carefully evaluated it in consultation with our financial and legal advisors.  While we understand your interest in our Company, we believe your offer of $9.25 per share significantly undervalues Emulex’s long-term prospects and is not in the best interest of our stockholders.  As a result, the Board of Directors has unanimously decided to reject your proposal.

Your proposal significantly undervalues Emulex’s long-term prospects, particularly with respect to new data center opportunities in network convergence.  As you are well aware, Emulex is successfully building a leadership position in the rapidly expanding network convergence market.  Over the past several months, Emulex has achieved numerous design wins with tier-one server original equipment manufacturers (OEMs) with our groundbreaking OneConnect™ Universal Converged Network Adapter (UCNA) platform and OneCommand™ convergence management framework.  These include five tier-one 10Gb/s Ethernet Network Interface Card (NIC) placements, three 10Gb/s Internet Small Computer System Interface (iSCSI) CNA placements and four 10Gb/s Fibre Channel over Ethernet (FCoE) CNA placements.  Our leadership in network convergence enables us to expand into new product categories that have significantly increased our value to OEMs and will more than double our current addressable market.  We expect to see meaningful revenue from these products in calendar year 2010 and beyond, and hence, they will be a key value-driver for Emulex over the long-term.

Emulex’s existing host server and embedded storage businesses also continue to represent significant value.  Our established customer base includes a broad range of server and storage OEMs, including Cisco, Dell, EMC, Fujitsu, Hitachi, HP, IBM, LSI, NEC, NetApp, Sun and Xyratex, among others.  The Company is continually innovating new products and solutions in our core business, such as our new encryption HBA and our embedded storage systems and solutions, to meet our customers’ evolving needs.  With our strong customer base, our established sales channels, and our proven innovation in these markets, Emulex expects to deliver significant value to its stockholders.

Additionally, we have made significant operational improvements in the Company’s cost and tax structure, while at the same time increasing our international operations over the last several quarters.  We believe these changes will enable Emulex to more efficiently serve our global customer base and ultimately result in increased profitability and value-creation over the long-term.

Your unsolicited proposal is opportunistic given Broadcom is uniquely aware of the new unannounced design wins that Emulex has secured with tier-one OEMs at the expense of Broadcom and other competitors.  As you know, these design wins are kept confidential at our customers’ request and do not typically begin contributing revenue for several quarters.  Thus, Emulex’s stock price does not fully reflect the long-term value creation potential that the Company has already secured.  However, given that some of these design wins have come at your expense, including your core Ethernet networking business, you are uniquely aware of the future value we have secured and how well positioned we are to unseat you on many other platforms in the near future.  We believe your proposal is an opportunistic attempt to capture that value, which rightly belongs to our stockholders.

Your unsolicited proposal is an opportunistic attempt to take advantage of Emulex’s depressed stock price due to unprecedented macroeconomic conditions.  Your proposal is approximately 37% below the Company’s 52-week high of $14.74 per share.  Over this same time period, the Nasdaq is down approximately 33% and our industry as a whole is trading at significantly depressed values.  Additionally, Emulex’s stock was trading near its lowest levels in nearly ten years just before your proposal.

In closing, I note that your April 21 letter incorrectly describes our prior communications regarding your interest in Emulex, as well as Emulex’s corporate governance structure.  It is unclear why you raised these subjects and made inaccurate statements in regard to them as they are unrelated to your proposal, so I will not respond other than to strongly urge you that any statements you plan to release to the public or make to stockholders or customers in the future be accurate.

The Board of Directors is very enthusiastic about the future prospects of the Company and the long-term value potential of our current strategy.  As such, while we understand your interest in our business, we believe your proposal to acquire Emulex significantly undervalues our Company and is not in the best interests of Emulex stockholders.

Sincerely,

Paul F. Folino
Executive Chairman
Emulex Corporation

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