Cisco Looms Large In Emulex Bid Rejection

By rejecting Broadcom's $764 million bid to buy the company, networking component vendor Emulex's board is showing confidence in its strategy and is willing to go it alone in a market that is becoming increasingly inhospitable to independent players.

Ever since Cisco announced plans to manufacture its own servers and compete not only in the traditional networking space but in the server and storage area as well, other large vendors have lined up in battle arrays and smaller vendors have rushed into the protective arms of larger partners -- IBM's recent agreement with Juniper is the most recent example.

But it may well be the promise of a stronger relationship with Cisco that emboldened Emulex to choose independence over Broadcom's unwelcome embrace. When Cisco rolled out its all-encompassing Unified Computing System in March, Emulex was one of the vendors it introduced as a partner, perhaps to show it was willing to leave enough oxygen for some. Jeff Benck, COO at Emulex, told me on the phone this morning that Emulex has had a few non-public customer wins with tier-one OEMs, and you don't get more tier-one than Cisco.

Benck didn't mention Cisco specifically, and he stuck to his talking points about why the company rejected Broadcom's offer of $9.25 per share. Shares have traded below $6 as recently as March. He said, however, that Broadcom was trying to take advantage of Emulex's depressed stock price and the knowledge of those customer wins where it had competed against and lost to Emulex. The offer "significantly undervalues Emulex's long-term prospects at a time when we're poised for explosive growth," he told me.

Benck also said Emulex sees the bid as a validation of its strategy to link its fortunes to the broad adoption of virtualization technology. Virtualization is used to improve the utilization rates of both servers and storage devices by allowing customers to load many virtual machines onto a much smaller number of physical devices, and to move data to and from servers and storage units quickly. The speed with which this technology can accomplish these tasks is dependent to a great extent on the type of components sold by Emulex to the likes of Cisco, HP and IBM.

Benck told me he sees the company's addressable market doubling to $1.5 billion by 2013. Unlike many other public companies considering unsolicited bids, however, Emulex's board is unlikely to come under significant pressure to sell, in large part because it is around 80 percent owned by institutional investors who are, by and large, more patient than retail investors. Benck told me, "you can be sure we'll be reaching out and talking to all of our top shareholders today."

Broadcom's CEO Scott McGregor made it no secret that he would likely pursue "other options," namely Emulex rival QLogic, if Emulex rejected his bid, and that eventuality may now be around the corner. But again, Benck said he likes his company' strategy. "I wouldn't be fazed by that," he said.

Fazed or not, if Broadcom does swallow QLogic, that leaves Cisco in a very dicey situation, with the possibility that one of its rivals -- namely Broadcom -- will be in a position to squeeze its supply chain for a very critical component. That would leave it very little choice but to make an offer of its own to Emulex -- one that Emulex might have no choice but to accept.