From a Markets Perspective, Going It Alone Can Be Expensive

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Includes: AVGO, ELX
by: 451 Research: Inorganic Growth

by Brenon Daly

Wall Street hasn’t been particularly supportive of tech companies that turn down unsolicited offers and opt to go it alone. Shares in a number of the targeted firms are currently changing hands at less than half the level that the would-be suitors were willing to pay for them. To wit: Microsoft (NASDAQ:MSFT) was reportedly set to pay in the mid-$30s for each share of Yahoo (YHOO), which is now trading in the mid-teens. And having spurned a $16-per-share unsolicited bid from Cadence Design Systems (NASDAQ:CDNS) last summer, Mentor Graphics (NASDAQ:MENT) stock is now trading at about $7.

We mention that bit of cautionary history because there’s another showdown brewing. Broadcom (BRCM), advised by Bank of America Securities (NYSE:BAC), recently offered $9.25 for each share of Emulex (NYSE:ELX), giving the unsolicited bid a total equity value of $764m. (As it often does, Goldman Sachs is advising the target.)

Broadcom’s bid values Emulex where it was trading last October. On an enterprise value basis, the proposed transaction values the maker of storage networking gear at just 1.2x its trailing 12-month (TTM) sales and 5.5x TTM EBITDA. Emulex investors want a richer valuation and have pushed the stock above $10 since the offer was unveiled. Broadcom has vowed to take the unsolicited bid directly to shareholders if the Emulex board rebuffs it. On its conference call Monday discussing fiscal third-quarter results, Emulex said only that it was ‘thoroughly’ reviewing Broadcom’s offer.

From Broadcom’s point of view, it’s understandable why it would want its fellow southern California-based company. If the deal goes through, Broadcom would get a foothold in a few interesting storage markets such as host bus adapters (for both standard servers and blade servers) and embedded storage processors for disk arrays. Broadcom sells Gigabit Ethernet and 10-Gigabit Ethernet products, but is not a player in the SAN market. With network convergence growing in popularity, Broadcom would also benefit from Emulex’s fiber channel technology and its new Fiber Channel over Ethernet adapters.