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Boardroom brouhaha brewing at Emulex after Endace buy

Why not buy shares instead, demands share holder

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You win some; you lose some. Emulex has completed its acquisition of networking analytics company Endace against the opposition of activist investor Elliott Management, but had to accept the appointment of two Elliott nominees to its board.

Emulex mostly sells SAN Host Bus Adapters (HBAs) and has a line of Ethernet Converged Network Adapters (CNAs) and embedded storage controllers. Generally speaking it has not lived up in revenue terms to the promises made when it resisted a takeover attempt by Broadcom in 2009 and its share price has fallen.

Naturally this disappointed its investors, opening up an opportunity for activist investors like Elliott Management, run by billionaire Paul Singer, and fellow investors Altai, to buy stock and agitate for shareholder value to be quickly boosted through asset sales, dividends or even a divestment.

Elliott has been agitating for board representation on the basis of its stock holding, saying Emulex should not waste its money on the pointless acquisition of Endace.

Altai has said: "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."

Elliot's Jesse Cohn, a portfolio manager, said in a canned quote: "We are very pleased to have worked collaboratively with Emulex to add Gene Frantz and Greg Clark to its Board. Jim and his team at Emulex have a solid strategy and have developed leading technology in their focused markets and we believe that the addition of Gene and Greg to the Board will help Emulex to realise meaningful value for stockholders."

Since Emulex has not developed leading technology in the Ethernet monitoring area but acquired it through Endace, this statement is not exactly supportive of the Endace acquisition.

The two additions to Emulex's board, Frantz and Clark, joined the company at Elliott's behest - but with the approval of Emulex.

Gene Frantz' background includes being a partner at TPG Capital, Oracle Ventures, and Morgan Stanley. He enjoyed prior stints on the boards of ALLTEL, Avaya, Freescale Semiconductor, Network General, MEMC Electronic Materials, Paradyne Networks, SMART Modular Technologies and Certance Holdings. He calls himself a private equity professional.

Greg Clark is the CEO of Blue Coat Systems and has been CEO at Mincom and E2open, as well as founding security software firm Dascom, acquired by IBM in 1999 and used as the foundation for the Tivoli security product line. Clark was an IBM Distinguished Engineer and vice president of IBM's Tivoli Systems for a while.

Emulex's board will now grow to 11 directors unless some of the existing nine go.

Emulex collaborated with Elliott in the addition of these two directors to its board and there is an agreement between Emulex and Elliott which includes limitations on acquisitions of additional Emulex shares above its 15 per cent stake by Elliott.

Other aspects of the deal include Elliott agreeing not to enter into a proxy war (competing for shareholder votes at Emulex AGMs) on the sale of Emulex until March next year, or any other Emulex proxy contests until August this year.

With two Elliott cuckoos in the Emulex nest, we can expect them to throw their weight about and agitate for change; change which will help Elliott make a profit on its Emulex holdings.

Will the Endace nestling have to go? Are in-array controllers toast? The clock is ticking and the old Emulex board is going to have to make some hard choices. ®

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