Emulex Still May Refuse Higher Offer (ELX, BRCM)

Emulex Corporation (NYSE: ELX) has already given an initial response to the higher $11.00 offer from Broadcom Corporation (NASDAQ: BRCM).  This is not an outright rebuff, but Emulex said that its board of directors is following fiduciary duties with the assistance of its financial and legal advisors.  So far it has merely said that it will review the terms of the revised tender offer.

The Emulex board said that it will make its recommendation to stockholders on the offer in due course, but also is urging stockholders not to tender any shares pending its recommendation.  We have our own reasons to believe this, but we think the management at Emulex will seek a higher price.

The prior offer from Broadcom was $9.25 per share in cash, which Emulex quickly said undervalued the company significantly.  Whether the company gets any solid firm offer above this new offer is another matter, but we have had our own thoughts on this matter.  Where a stock has been in the past may matter to a  long-term holder and to the company’s management.  That is still of little matter in general to most buyers.

Before the stock began its slide last summer, Emulex had barely traded under $11.00 for a multi-year period.  At the last report, the company’s total liabilities were $80.2 million and the company had over $300 million in cash and liquid assets.  It also had more than $75 million in receivables and inventory, and roughly the same amount again of over $76 million in property, plant, and equipment.

So when you start backing out the net cash after the debt and the hard assets, the value here is somewhere around $375 million and its “net tangible assets” were listed as $432 million.  This stock was also north of $20.00 per share in parts of 2005, 2006, and 2007.

Broadcom is also dismissing its case which challenged the validity of the Emulex poison pill as an anti-takeover measure.  It has also extended the offering by ten days out to July 14, 2009.

Management has not given any formal figures, but after looking back over some of our more lengthy mergers in technology and the company’s reactions to such mergers) it sure seems like it may take somewhere around $15.00 to close the deal.  That is our own estimate based solely upon the company’s response and its past trading history and is not an endorsement nor a critique of its real value as an enterprise.  Whether the company is really worth that today, that is more of a question in the minds of management at Broadcom and at Emulex.  Shares were under $7.00 before the first bid came in during late-April.

Before you start thinking this is way off base, shares had already been trading well above the initial offer.  And the first trades after the open today have Emulex shares trading down over 3% and just under $10.50.

Jon C. Ogg
June 30, 2009