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SOLD: Emulex – for 34% less than shareholders were offered 6 years ago

Avago has a go, wins neat $606m deal

Comment Data networking outfit Emulex, harried by activist investor Elliott Management, has given up its independence and shopped itself to Avago Technologies for $606m in cash – $8/share – giving execs and investors a nice windfall.

As well as Emulex, Avago also acquires the firm's mainstay Fibre Channel HBA business, its nascent Ethernet link analysis business Endace and other sundry silicon bits and pieces.

Fibre Channel is not really growing but is a classic cash cow, with the 8Gbit/s to 16Gbit/s transition under way and a 32Gbit/s changeover coming – with predictable upgrade and OEM business in prospect.

Although FC SANs are under attack from server SANs, hyper-converged systems, iSCSI SANS and HDFS big data clusters, their future looks assured and stable.

Endace is a different story. Bought a couple of years ago as part of an attempt to rekindle growth, Emulex had hoped it would contribute $40m/year to its revenue, but it is doing a tenth of that.

Elliott Management bought into Emulex before the Endace buy, and had opposed that financial adventure.

Avago is a portfolio-building company and not a high-growth tech start up in the classic storage style. The odds are that, as with its LSI acquisition, it will keep the bits it wants and sell off the others – which, we expect, could mean Endace may be up for sale.

Hock Tan, Avago's president and CEO, gave out a prepared quote: "Emulex's connectivity business fits very well with Avago's existing portfolio serving the enterprise storage end market."

Benck added his own canned remark: "This combination represents a great opportunity for Emulex and its employees to build upon our history of delivering leading-edge solutions to our customers, while providing immediate value to our stockholders."

The announcement also includes this gem: "Senior members of the Emulex management team and all of the directors of Emulex, collectively owning approximately 2.5 per cent of Emulex's outstanding shares, have executed Tender and Support Agreements in support of the transaction."

Could have done better...

Remember when Broadcom tried to take over Emulex in 2009 with a maximum bid of $912m, which Emulex's board rejected, saying it undervalued Emulex?

Now, five years later, it has accepted a $606m bid: that's 34 per cent lower. Although, credit where credit's due, Emulex's revenues did grow from fiscal 2009's $378m, through 2010's $400m up to $502m in 2012 – but they have since declined to $447m in FY 2014.

Enough already.

What does this mean for QLogic, the other HBA supplier, which has also suffered as the FC revenue growth rate slowed and its get-out-of-FC-jail efforts faltered? QLogic has picked up Brocade's HBA biz, sold off an InfiniBand business to Intel and is making more money than Emulex, expecting to pass $500m annual revenues in its latest financial year. Its profit at the nine-month point is about $40m.

Emulex did slightly less than $450m in its latest financial year and made a $29.5m loss.

QLogic is now a mature company, its high-growth days are behind it. It can reasonably expect to be a profitable cash-generating HBA business and must hope to use that cash to invest in growth technology sectors. Alternatively, it could make a nice cash-generating acquisition for an Avago or PMC Sierra-like company.

Based on the Emulex buy – $606m for $450m revenue – its price could be $750m-ish.

El Reg also wonders about the fit between SAN network sniffing and upper-stack analysis companies like ExtraHop, Virtual Instruments and QLogic. Theoretically the technologies would seem to be complementary.

With the Avago buy, Emulex customers and channel partners will be relieved at the removal of uncertainty over Emulex's future. The boards of both Avago and Emulex have agreed the transaction and it's pretty much a done deal, if Emulex's shareholders play nice. The deal is set to close by November this year. ®

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