Starboard Value LP, the activist hedge fund headed by Jeffrey Smith, said Emulex Corporation (NYSE:ELX) is “extremely undervalued,” but it has clear opportunities to unlock significant shareholder value after conducting extensive research regarding the business of the network equipment maker.

Starboard Value

In a letter to the board of Emulex Corporation (NYSE:ELX), the activist hedge fund expressed disappointment with the fourth quarter financial results of the company. Emulex Corporation (NYSE:ELX) reported $0.15 non-GAAP diluted earnings per share on $120.4 million revenue.

Starboard Value demanded changes in the leadership of the network equipment maker to address the poor performance of its business operations and stock price.

The activist hedge fund, the stock price Emulex Corporation (NYSE:ELX), underperformed its peer group and the broader market in every time frame. According to Starboard Value, the stock declined by 40 percent prior to reports of speculations that the company engaged the services of a financial adviser to explore strategic alternatives.

Starboard Value added that the $6.66 per share price of the Emulex Corporation (NYSE:ELX) on July 2 was 39 percent lower than the $11 per share all-cash acquisition offer of Broadcom Corporation (NASDAQ:BRCM) in 2009.

Starboard Value believed that Emulex Corporation (NYSE:ELX) is undervalued because of many reasons, but primarily due to a “long history of poor capital allocation decisions.”

“After years of underperformance, we believe Emulex’s current share price does not properly reflect the value of its underlying assets.  Despite the recent concerns about growth, we believe Emulex’s core fibre channel HBA product segment is a valuable asset that will continue to generate strong cash flow for years to come,” wrote Starboard Value.

According to the activist hedge fund, the fibre channel business of Emulex Corporation (NYSE:ELX) is attractive because the market for fibre channel adapters is duopoly and the company enjoyed high margins historically.

Starboard Value emphasized that the company has a “terrible habit” of retaining its former CEO on the board. The activist hedge fund believe that a newly reconstituted board composed of independent directors and shareholder advocates would be able to evaluate the businesses of Emulex Corporation (NYSE:ELX) and to identify the right strategy to boost shareholder value.

Starboard Value owns a 7.9 percent stake in Emulex Corporation (NYSE:ELX). The activist hedge fund initially acquired 6.25 million shares, or a 6.9 percent stake, after hiring Goldman Sachs to find potential buyers for the company last July.

Last month, Stifel recommended a hold rating for the shares of Emulex Corporation (NYSE:ELX) after reporting its fourth quarter financial performance. The research firm indicated that the core FC fundamentals of the company continue to experience pressure particularly from weak Unix server market.