Riverbed Seen Luring Bids Compuware Didn’t Get: Real M&A

Elliott Management Corp. may have better luck sparking a bidding contest for Riverbed Technology Inc. (RVBD) than it did for Compuware Corp. (CPWR) a year ago.

The activist investor is probably trying to draw competing bids for Riverbed with its $19-a-share takeover offer, said stockholder Parnassus Investments. Last year, a similar bid for Compuware by Elliott was rejected and hasn’t been topped. Riverbed, which is focused on technology for managing data networks and more digestible for a buyer, has a better shot of drawing competing bids than Compuware, which was more of a conglomerate, said MKM Partners LLC.

Riverbed closed last week 4.8 percent above Elliott’s bid, the widest gap among pending North American deals of similar size and an indication that traders expect a higher offer. Technology companies such as International Business Machines Corp. (IBM) and Juniper Networks Inc. (JNPR) may consider a deal, according to Gabelli & Co. Albert Fried & Co. said the biggest challenge will be convincing Riverbed’s management to sell after the company adopted a poison pill to thwart unwanted takeover attempts. Elliott’s plan still may work, according to FBR & Co., which said Riverbed may also lure private-equity firms.

Elliott’s proposal “just gets the party rolling,” Daniel Ives, a New York-based analyst at FBR, said in a phone interview. “It’s going to be a drawn-out process. But I ultimately believe there’s going to be a lot of other parties that could enter the fray.”

Busy Week

The activist investor, which still has a stake in Compuware, was busy last week. In addition to the offer for Riverbed, Paul Singer’s Elliott also reached a pact with Compuware that lets it nominate two board directors in exchange for abiding by a standstill agreement. Elliott agreed to vote in favor of a reconstituted Compuware board, with six new members out of 11 at its upcoming shareholder meeting.

Elliott offered to buy San Francisco-based Riverbed last week, two months after revealing a more than 10 percent stake in the company. In disclosing its position, the New York-based hedge fund said Riverbed was “significantly undervalued” and urged it to review its strategy and capital structure.

Elliott’s takeover offer for Riverbed would include a go-shop period to allow the board to seek competing offers, and the hedge fund said it may boost its own bid after conducting due diligence. Riverbed said its board is reviewing the proposal.

Representatives for Riverbed and Elliott declined to comment.

Bid Potential

Riverbed has climbed 12 percent since Elliott’s proposal was announced and closed last week at $19.92. No other North American takeover target is trading higher above pending or proposed bids of more than $500 million, according to data compiled by Bloomberg.

Today, Riverbed climbed 0.2 percent to $19.95 at 9:58 a.m. New York time.

The move is a sign that investors believe “there’s real potential for a higher bid,” Jefferies Group LLC analysts led by George Notter wrote in a Jan. 9 report. “We tend to agree with this view.”

Riverbed has faced criticism over its 2012 acquisition of Opnet Technologies Inc., and it’s poised to report its first annual loss in seven years. Still, it has quality products that may appeal to larger technology firms, said Jerome Dodson, president of San Francisco-based Parnassus. The firm oversees more than $10 billion and is the eighth-largest holder of Riverbed shares, according to data compiled by Bloomberg.

In Play

“The price seemed on the low side, but I think that it was just a way for Elliott management to put the company in play,” said Dodson, who wants $25 a share in a sale. “I certainly agree that the company could do a better job of providing value to shareholders. If a strategic buyer could offer good value, it might be a good fit.”

Riverbed could attract interest from large enterprise software companies such as IBM or network-equipment makers such as Juniper and San Jose, California-based Cisco Systems Inc. (CSCO), according to Hendi Susanto, an analyst at Gabelli. Gabelli’s parent company Gamco Investors Inc. oversees more than $43 billion including shares of Riverbed.

Representatives for Armonk, New York-based IBM, Sunnyvale, California-based Juniper and Cisco declined to comment on whether their companies would want to acquire Riverbed. In a statement today, Elliott said it had amassed a 6.2 percent stake in Juniper and will seek cost cuts, stock buybacks and other changes at the $13 billion company.

Riverbed may make more sense as a target for private-equity buyers, who would find its free cash flow and the chance to cut costs and boost margins appealing, said Ives of FBR.

Lagging Margins

Analysts estimate Riverbed will generate more than $200 million in free cash flow this year. The company’s trailing 12-month operating margin of 2.5 percent lags behind two-thirds of North American communications equipment companies valued at more than $1 billion, according to data compiled by Bloomberg.

“It kind of screams financial buyer,” Ives said. “All of a sudden you cut costs, take the company into the body shop, next thing you know a few years later, it’s a much healthier company with better growth and more efficiency.”

Strategic buyers may hesitate to pursue Riverbed because of its focus on wide-area-network data transferring, an industry which is expanding slower than the cyber-security or cloud-based software areas that have attracted M&A interest recently, Ives said.

While Susanto of Gabelli estimated Riverbed could be valued at $25 a share in a sale this year, Keith Moore of MKM said competing bids may be closer to about $21 a share for private-equity suitors and about $23 for strategic buyers.

More Manageable

Compuware also traded above an $11-a-share bid from Elliott every day for months. It hasn’t disclosed the receipt of any higher offers.

Drawing rival proposals for Riverbed should be more manageable, Moore, an event-driven strategist at Stamford, Connecticut-based MKM, said in phone interview.

Compuware “was a conglomeration of all kinds of businesses that needed to be unwound, and it wasn’t a company that was going to be easy to find one buyer for,” Moore said. With Riverbed, “there is an impetus for a strategic or a private-equity firm to take a close look at it.”

Riverbed’s management may have a higher price in mind than what suitors are willing to pay, and has protections including the poison pill and a staggered board, said Sachin Shah, a special situations and merger-arbitrage strategist at New York-based Albert Fried.

Thorough Defenses

“There’s certainly a chance that the management team is going to say no and reject it,” Peter Drippe, a New York-based fund manager at Visium Asset Management LP, which oversees about $5.5 billion including Riverbed shares, said in a phone interview. “They have pretty thorough corporate defenses.”

With the shares up 32 percent since Elliott’s involvement was first disclosed, Riverbed may no longer be able to ignore the opportunity to sell the business, said Notter of Jefferies. It’s a move shareholders will likely welcome, said Ives of FBR.

“I do think an eventual sale is definitely one of the most logical possibilities,” Ives said. “A lot of investors feel like they’ve been on this Riverbed ship in the middle of the ocean in a storm and Elliott is like the Coast Guard rescuing them.”

To contact the reporter on this story: Brooke Sutherland in New York at bsutherland7@bloomberg.net

To contact the editor responsible for this story: Sarah Rabil at srabil@bloomberg.net

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