Will Emulex Consider Broadcom’s 'best' Offer?

Yesterday, Broadcom Corporation (BRCM - Analyst Report) raised its hostile tender offer to acquire all outstanding shares of its rival Emulex Corporation (ELX - Snapshot Report) from $9.25 per share to $11.00 per share. Broadcom has been involved in a fierce battle to acquire Emulex since May. Broadcom stated that the $912 million revised offer is the best the company can offer for Emulex. Broadcom also extended its tender offer further to July 14, 2009. The company had earlier extended its offer to July 1, 2009, which was set to expire on June 17, 2009. The stockholders had tendered about 2.3 million shares or about 2.8% of the total outstanding shares by June 17, 2009.

Broadcom had earlier offered to acquire Emulex for $9.25 per share or $764 million. Emulex has stated that its shareholders have supported the company's stand to reject the acquisition offer, as reflected by the meager number of shares tendered and management believes that the stock has continuously traded well above Broadcom's offer since its announcement. Emulex has also argued that Broadcom’s proposal is approximately 37% below the company’s 52 week high of $14.74.

The all cash new offer represents a 66% premium over the stock price of $6.61 on April 20, 2009. Broadcom further stated that in the absence of its acquisition offer, the stock price of Emulex would have been up approximately 7.6% in the past two months to trade at $7.11 (in line with its closest peer QlogicCorp.). Broadcom’s revised offer represents a 55% premium to this implied price. Meanwhile, Emulex has advised its shareholders not to accept this revised offer until the Board recommends.

Emulex has already turned down the bid twice arguing that the offer significantly undervalues Emulex's long-term prospects and is grossly inadequate as it fails to include the potential value of unannounced products and their future contribution to revenue. Emulex feels that Broadcom intends to take advantage of its deflated stock price amid recessionary conditions.

Broadcom had earlier asked Emulex for more details on confidential information about its unannounced design contracts and signaled that it might be willing to raise its offer. Broadcom’s CEO justified that the offer price of $9.25 per share for Emulex was based on publicly available information. However, Emulex’s management denied the request for access to confidential information stating that Broadcom was asking for "highly competitive and sensitive information" such as details about Emulex’s technology, its financial and customer plans.

Both companies do business in the networking market. Enterprise network equipment moves corporate data and communications between computers, servers, mainframes and storage systems. There are two technologies for moving data in this market – Fibre channel, where Emulex dominates, and Ethernet, which is Broadcom’s forte. But, a combined technology has emerged namely, Fibre Channel over Ethernet, or FCoE, which costs less to deploy. Emulex and its partner ServerEngines offer FCoE, but not Broadcom. We believe Emulex shares should start gaining momentum as the economy starts recovering and Broadcom’s offer is indeed opportunistic. We maintain a hold on Broadcom.