The sweet science

BROADCOM CORP. is hoping that honey will work where hostility didn't in its attempt to acquire Emulex Corp., but the target's shareholders aren't so sure. On June 30, Irvine, Calif.-based Broadcom increased its bid for the storage equipment maker by almost 19%, to $912 million, or $11 per share; forswore an effort to take control of Emulex's board; and dropped litigation in Delaware in which it challenged Emulex's takeover defenses. Emulex's shares sagged from $10.88 to $9.72 per share on the news, either because shareholders expected a bigger bump or out of fears that the board would reject the offer. Shares continued to fall through July 2.

Were Broadcom to succeed in its quest for Emulex, the deal would be the third largest in the U.S. tech sector this year after Oracle Corp.'s $7.4 billion agreement to buy Sun Microsystems Inc. and NetApp Inc.'s $1.9 billion agreement to buy Data Domain Inc., which interloper EMC Corp. is trying to upend. Broadcom's pursuit of Emulex is the latest in a series of hostile bids for tech companies stretching back to last year's aborted pass by Microsoft Corp. at Yahoo! Inc. It also shows the obstacles such efforts continue to face.

Chief among them is the belief of many target boards that their companies are severely undervalued. Robert Goon, an Emulex board member since the company was founded in 1979, said at his deposition in the Delaware litigation that he thought Broadcom's initial bid of $9.25 was low; as late as October, Emulex traded at around $14 a share. "I have a belief that it is inadequate," Goon said. "It was a lot higher before. I think it can be a lot higher in the future. I have been on this board a long time and we have reinvented this company over and over again."

In the mid-1990s, Goon said, Emulex had a market capitalization of around $70 million but within a few years was worth more than $15 billion. Goon called that turn of events "influencing." "We have done it before," he said. "I think we can do it again and get another run out of this with the changing market."

Broadcom quoted that testimony in its pretrial brief in Delaware in support of its contention that Emulex's directors "have too much history and pride to sell 'their' company." But regardless of target directors' motivations, shareholders' fears about selling too cheaply may make them less likely to pressure management than they would be in a market where stocks seem fully priced. That skittishness means gambits such as Broadcom's effort to replace the Emulex board are less likely to succeed.

Broadcom first approached Emulex about a merger in December. Emulex rebuffed the offer and stiffened its takeover defenses in response. Among other things, the board amended the company's bylaws to strip shareholders of their right to call a special meeting rather than wait for Emulex's annual meeting in November to oust directors.

Broadcom went hostile and launched a tender offer for Emulex on May 4, but a month later only 3% of the target's shareholders had tendered, suggesting that they shared their board's dim view of the bid.

The bidder also sued Emulex in the Delaware Court of Chancery, where the outcome of the litigation would have been "hard to handicap," says Larry Hamermesh, a professor at Widener University School of Law in Wilmington. That's because Emulex's board acted to diminish the shareholder franchise, a core concern of Delaware law.

But even had Vice Chancellor Leo E. Strine Jr. ruled for Broadcom, the bidder would have needed to raise its price. By pulling the litigation and the consent solicitation, Broadcom tacitly admitted that Emulex's board would agree to a deal at a price its shareholders consider reasonable. Whether Broadcom was willing to do so is another question.