Emulex sues Broadcom to block takeover

The suit cites the felony indictment of Broadcom cofounder and former top exec Nicholas as proof the company can't be trusted

Emulex has taken its efforts to avoid a hostile takeover by Broadcom to court, suing the company for unfair business practices and citing the drug-trafficking and securities-fraud indictment of Broadcom's former top executive as proof to its shareholders that Broadcom officials can't be trusted.

The move is the latest by Emulex to fend off Broadcom, which has been trying to purchase Emulex since late last year and recently took its US$9.25-a-share offer directly to Emulex's shareholders in a tender offer.

Emulex claimed that shareholders should be wary of Broadcom's offer because it has not fully disclosed information relating not only to statements it's made about its offer to purchase Emulex but also about former CEO and cofounder Henry Nicholas' alleged criminal activities, according to documents filed in an Orange County, California, Superior Court. Both companies do business in Orange County - Emulex in Costa Mesa and Broadcom in Irvine.

Nicholas, who served as CEO, president and co-chairman of Broadcom's board from 1991 until early 2003, is awaiting trial - set for next February - on drug-trafficking and securities fraud charges. He has pleaded not guilty to the charges.

Despite his situation and his resignation from Broadcom, Nicholas continues to be involved in Broadcom's business affairs, including interviewing and selecting current CEO Scott McGregor and current board members, Emulex claimed in its 60-page court filing.

In a statement, Emulex said the suit "speaks for itself" and that its stockholders, while considering Broadcom's tender offer, should be "fully and fairly informed about the history of the company."

In a statement, Broadcom characterized Emulex's escalation of the bad blood between the two companies as "mud slinging and scorched-Earth tactics" designed to block what Broadcom believes is a good offer to buy Emulex.

"We are disappointed Emulex would confuse the issue of a highly attractive, all-cash offer with items such as these," Broadcom said in a statement. "None of the historical claims in this suit is relevant to Emulex's stockholders' decision to accept US$9.25 per share in cash from Broadcom today."

Moreover, the company said that some of Emulex's largest shareholders believed that the company's management team was open to a deal, which led Broadcom to reach out to Emulex executives late last week in an effort to close a deal.

Emulex once again "rebuffed" those efforts, though Broadcom even now remains open to a deal, the company said.

Last month Emulex's board rejected an unsolicited bid by Broadcom to purchase the company for what would amount to about US$764 million, claiming the offer undervalued the company. The rejection led to Broadcom's tender offer to shareholders on May 15, which Emulex's board has advised against.

Broadcom first made its bid public in a letter to Emulex shareholders on April 21 after talks broke down in January.

Broadcom produces semiconductors used mainly in communications products, such as communications networks, cell phones and cable set-top boxes. Emulex provides technology for connecting storage, servers and networks in data centers, working with large storage vendors such as EMC, HP and IBM.

In its April 21 letter, Broadcom cited Emulex's Fibre Channel expertise as one of the reasons it wanted to buy the company. At the time, it said the two companies did not have much product overlap, another reason the deal would be beneficial to them and their shareholders.

However, Emulex has said that while the companies traditionally did not compete when it mainly offered storage networking and Fibre Channel products, increased convergence of storage and data networks now puts the two in head-to-head competitive situations. Emulex has been winning some of those deals, and Broadcom's offer is a lowball attempt to eliminate a competitor in its market, according to Emulex.