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Bolshy investor sinks teeth into weakened Emulex, tears off another chunk

Might just buy the boardroom right out from under it

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Under-performing storage network adaptor outfit Emulex is being stalked by activist hedge fund investor Elliott Management, run by billionaire Paul Singer. Elliott snaffled up an extra 1.34 per cent stake in the firm to bring its slice up to 11.3 per cent, making it the largest shareholder. This represents the best hope for Emulex investors angry at its $130m bid for Endace. Is an Elliott bid for Emulex coming?

Background

There are two dominant storage network adaptor suppliers, QLogic and Emulex, with QLogic having come out of Emulex some years ago. Emulex also has a line of Ethernet gear and faces a maturing Fibre Channel host bus adapter (HBA) and Ethernet/iSCSI/FcoE converged network adapter (CNA) market that is still waiting for mainstream customer FCoE rollouts. It faces strong competition in the Ethernet space but has recently announced an agreed bid for New Zealand Ethernet monitoring supplier Endace, arguing that this increases its total addressable market and provides an opportunity for growth.

Previously Emulex rebuffed an $11/share bid from Ethernet supplier Broadcom after a protracted battle involving a poison pill defence. Broadcom sued it for IP infringement during and after that battle and has so far won about $60m in awards - and has the lovely prospect of winning more as the legal cases pass tortuously through the court system. Emulex management rejected the $11/share bid because it did not reflect, executives said, a fair value for the company.

Cue snorts of angry derision from shareholders, who are getting used to Emulex shares trading in the $6.00 - $8.00 range.

Since the Broadcom bid battle, Emulex shares have gone downhill as this Google Finance chart shows:

Emulex shares since 2009

Emulex share price movements since 2009. Click on image for larger version.

With the prospect of the fiscal cliff persuading other storage and IT companies to award special dividends to their shareholders, some Emulex stockholders are in a state of near-revolt - according to people we have spoken to. This is because the $130m which is being spent on buying relatively unknown Endace and entering a market Emulex knows nothing about could have been given to investors as dividends.

Watching their company spend $60m compensating Broadcom for using its IP without permission is another bitter pill for shareholders to swallow.

Enter Elliott Management which has steadily been building up its stake in Emulex. It had a 7.1 per cent stake at 28 September 2012, and around half that in June 2012. A November SEC Form 4 Filing showed that the Elliot Associates and Elliott International hedge funds had 3.2 million shares and 6.07 million shares respectively in Emulex, meaning Elliot Management had 9.34 million shares: an increase of more than 50 per cent since early October and equal to about 10 per cent of Emulex's shares outstanding.

Now Bloomberg reports that Elliott has upped its holding to 11.3 per cent.

Emulex is capitalised at $591m. In the past, Elliott, with an 8.5 per cent stake, mounted a $2bn bid for networking supplier Novell, which was eventually sold to Attachmate for $2.2bn in April last year. It has also pressed BMC Software to sell itself and this pressure helped prompt BMC to undertake a $1bn share buy-back exercise in October.

Against these billion dollar deals, $591m seems affordable.

Elliott also has a stake in Fibre Channel switch and director supplier Brocade, which has also moved into Ethernet switches, where CEO Michael Klayko has announced his looming resignation after the company had tried to sell itself unsuccessfully for two years.

An 11.3 per cent stake in a $591m company equates to $66.8m, serious money by any standards. Elliott is Emulex's largest shareholder and, we surmise, will want to make a profit on that cash, a quick profit - a profit inside 12 months we'd say.

El Reg's storage desk understands that Emulex's leadership team and board, seasoned and battle-hardened by the Broadcom affair, now face an equally seasoned and battle-hardened activist investor that will be intent on having its way. Elliott's presence on the shareholder lists tells Emulex bosses to, first, withdraw from the Endace bid and return money to shareholders, or, second, sell the company ... or - the implied Elliott threat - we'll make a bid for the company and do your shareholder value-raising work for you.

We suspect that Jim McCluney's team may not be running Emulex in 12 months' time and that Broadcom - or Brocade - has a fair chance of owning Emulex by then. ®

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