Altai Capital Management Not Happy With Emulex’s Acquisition of Endace

In our letter to you dated February 20, 2013, we expressed concern that the board of Emulex Corporation did not have appropriate shareholder representation.

On April 1, 2013, Emulex announced that it had appointed Gene Frantz and Greg Clark to its board of directors. We believe that Emulex working in collaboration with Elliott Management, the company’s largest shareholder, to add Mr. Frantz and Mr. Clark to its board is a step in the right direction.

In our prior letter, we also expressed disappointment that Emulex had chosen to pursue an acquisition of Endace Limited, which the company closed on April 1, 2013. Since announcing its intent to acquire Endace on December 5, 2012, Emulex’s share price has materially underperformed the market as well as its closest competitor, QLogic Corporation.

We believe that much of Emulex’s share price underperformance since December 2012, especially relative to QLogic, can be directly attributed to the company’s decision to proceed with the Endace acquisition. Since announcing its intent to acquire Endace, Emulex’s cash per share declined by approximately $1.08. Concurrently, Emulex’s share price declined by the same amount, implying that the equity market values Emulex’s cash far more than this acquisition.

Currently, Emulex trades at low valuation multiples relative to many of its peers. As we stated in our last letter, we believe this discount is in part due to investors’ dim view of Emulex’s future growth prospects, an opinion with which we strongly disagree.

Unfortunately, we must also conclude that Emulex’s valuation discount is somewhat deserved owing to valid investor concerns regarding management’s ability to allocate capital, accurately forecast its business, and make sound decisions on behalf of shareholders. It is hard for us to ignore that on July 9, 2009, Emulex rejected Broadcom Corporation’s $11 per share bid for the company. If your board had accepted that offer, shareholders clearly would be much better off than they are today.

Given your sizable forecast miss in the midst of a decision that had enormous economic consequences for your shareholders, we believe it will take many years for management to regain credibility in the public markets. Still, we are confident that Emulex continues to possess valuable assets and has a bright future. We contend that the best course of action is for Emulex to initiate a sale process, and we therefore request that the current board engage financial advisors immediately to undertake this task in earnest. We believe that a sophisticated buyer with the opportunity to properly diligence the company could pay a healthy premium to today’s share price and still earn an excellent return.

Absent a sale of the entire business, Altai Capital would only be satisfied as a long-term shareholder in the event of wholesale change at the board level. The board members who rejected Broadcom’s $11 per share bid for Emulex and/or oversaw the Endace transaction have done shareholders a significant disservice. Therefore, we intend to consider all of our options with regard to this year’s annual meeting in order to restore investor confidence and ultimately improve outcomes for shareholders.