Feeds

Emulex under second investor assault

First Elliott and now Altai

Bridging the IT gap between rising business demands and ageing tools

Emulex, faced with a relatively static Fibre Channel HBA market and with the great white Ethernet-carrying FCoE alternative being as lively as a lethargic turtle, has decided to buy Endace, a New Zealand–based concern with Ethernet deep traffic inspection and analysis gear, so as to expand its addressable market.

This got up Elliot Management's nose, hence its assault on the board. Now Altai Capital has revealed itself as a second aggrieved investor with a letter to Emulex CEO Jim McCluney, who sits on the board, saying the company is grossly undervalued by the stock market, that it can't understand why the Endace buy is thought to be a good thing, and that the board should think about flogging Emulex off to deliver cash to shareholders.

Here are excerpts from its letter:

We appreciate the time that Emulex's senior management has spent with us over the past year, especially our visit to your corporate headquarters last September and our meetings at Altai Capital's offices in New York. Our discussions with you, CFO Michael Rockenbach, President and COO Jeff Benck and other key members of your team have helped us greatly in understanding your business. We continue to gain an appreciation for the complex challenges Emulex faces over the coming years and we share your excitement for the numerous opportunities that lie ahead.

Unfortunately, the public markets do not seem to share our enthusiasm for Emulex's prospects. Over the past several years, Emulex's stock price has materially underperformed the market. ... we believe that Emulex is deeply undervalued. ... we are perplexed by the Company's recent announcement to acquire Endace ... We would have preferred that Emulex use its strong net cash balance to continue to repurchase its undervalued shares.

Altai's letter says Emulex' board owns such a trivially low amount of Emulex shares that they are not incented enough to drive the company hard enough. It provides a table to show this:

Emulex Insider holdings

Altai's comparison of insider holdings in its five largest investments

Altai then asks that Emulex "consider a number of strategic questions over the coming months, including the following:

  1. "Should Emulex continue to transform its business by (a) pursuing transactions such as Endace and (b) investing in research and development to address new growth markets;
  2. Should the Company concentrate on its existing businesses and pursue profitability over growth;
  3. Should the Company return capital to shareholders immediately through increased share repurchases; or
  4. Should Emulex pursue a sale of itself in its entirety?"

Its conclusion is that:

We believe that Emulex and its shareholders would be well-served to add members to its Board with a greater economic stake in the Company. ... We look forward to continuing our constructive dialogue with you to achieve this immediate objective as well as our shared longer-term goal of delivering the highest risk-adjusted return to shareholders.

In other words, Altai wants board representation and it wants the board to choose a strategy "with the highest expected risk-adjusted return, as opposed to the option with the highest projected future value," meaning, we understand, going for profitability rather than growth.

Elliott owned 11.3 per cent of Emulex's shares in December last year. It now owns 9.9 per cent, making it Emulex's main shareholder. Altai says it owns 5.4 percent meaning, being Emulex's fifth largest investor. This means that 15.3 per cent of Emulex shares, as it were, are in favour of a significant change in Emulex's strategy up to and including a company sale.

There does not appear to be any connection between Elliott Management and Altai Capital. Emulex has announced that acceptances have been received for 88 per cent of the shares in Endace. Emulex has made an extension of the acquisition offer period to February 26, 2013 for the remaining shareholders to submit their shares to accept the offer. Altai's letter and its release is timed to try to stop this from happening. ®

The Power of One Brief: Top reasons to choose HP BladeSystem

More from The Register

next story
BBC goes offline in MASSIVE COCKUP: Stephen Fry partly muzzled
Auntie tight-lipped as major outage rolls on
iPad? More like iFAD: We reveal why Apple fell into IBM's arms
But never fear fanbois, you're still lapping up iPhones, Macs
Nadella: Apps must run on ALL WINDOWS – PCs, slabs and mobes
Phone egg, meet desktop chicken - your mother
White? Male? You work in tech? Let us guess ... Twitter? We KNEW it!
Grim diversity numbers dumped alongside Facebook earnings
HP, Microsoft prove it again: Big Business doesn't create jobs
SMEs get lip service - what they need is dinner at the Club
ITC: Seagate and LSI can infringe Realtek patents because Realtek isn't in the US
Land of the (get off scot) free, when it's a foreign owner
Dude, you're getting a Dell – with BITCOIN: IT giant slurps cryptocash
1. Buy PC with Bitcoin. 2. Mine more coins. 3. Goto step 1
There's NOTHING on TV in Europe – American video DOMINATES
Even France's mega subsidies don't stop US content onslaught
You! Pirate! Stop pirating, or we shall admonish you politely. Repeatedly, if necessary
And we shall go about telling people you smell. No, not really
prev story

Whitepapers

Designing a Defense for Mobile Applications
Learn about the various considerations for defending mobile applications - from the application architecture itself to the myriad testing technologies.
How modern custom applications can spur business growth
Learn how to create, deploy and manage custom applications without consuming or expanding the need for scarce, expensive IT resources.
Reducing security risks from open source software
Follow a few strategies and your organization can gain the full benefits of open source and the cloud without compromising the security of your applications.
Boost IT visibility and business value
How building a great service catalog relieves pressure points and demonstrates the value of IT service management.
Consolidation: the foundation for IT and business transformation
In this whitepaper learn how effective consolidation of IT and business resources can enable multiple, meaningful business benefits.