May 16 (Bloomberg) -- Elliott Management Corp. took a significant stake in NetApp Inc., pressing the data-storage company to change its board and study options to boost shareholder value, people familiar with the situation said.
NetApp shares rose 6.2 percent, the biggest gain since Nov. 15. Elliott, the hedge-fund firm founded by billionaire Paul Singer, has been in talks with NetApp for weeks over its proposals, including a return of cash to shareholders, said one of the people, who asked not to be identified because the talks are private. Goldman Sachs Group Inc. is working with NetApp to help the company examine its options, one person said.
Elliott has a stake of less than 5 percent and it has proposed a slate of new directors for Sunnyvale, California-based NetApp, the person said. NetApp has been viewed as a takeover target for about a decade, with Oracle Corp. and Cisco Systems Inc. cited as potential buyers. While NetApp is positioned to benefit as businesses store and manage data on the Web, the company’s technology hasn’t kept up with larger rivals.
“NetApp is under attack from a lot of new technologies and ideas,” said Jayson Noland, an analyst at Robert W. Baird & Co. in San Francisco, who has a neutral rating on the stock with a price target of $34.
The stock advanced to $38.46 at the close in New York. The shares earlier rose as high as $39.15, the most since November.
Elliott may also increase its stake, said the person.
Representatives for Elliott, NetApp and Goldman Sachs declined to comment.
NetApp has too much cash and can return more to shareholders, according to Brian Alexander, an analyst at Raymond James & Associates Inc.
“Even after retiring the $1.2 billion convertible note due in June, they still have plenty of liquidity,” said Alexander, who rates the stock outperform with a price target of $40 a share. “A takeover is less likely because their technology is not well positioned for where the future in storage will occur, such as big data and cloud computing.”
By the end of April, NetApp had $7 billion of cash, of which half is in the U.S., according to an estimate by Alexander.
Before rising on the news of Elliott’s investment today, NetApp shares had declined 33 percent in the past two years wiping out $6.8 billion in market value, according to data compiled by Bloomberg. During the same period, the Standard & Poor’s 500 Information Technology Index increased 19 percent.
“They’re not paying a dividend, buying back stock aggressively or doing strategic M&A,” said Noland. “They need to pick a path” to return some cash to shareholders, he said.
NetApp’s market capitalization, which peaked at almost $47 billion in 2000 at the height of the dot-com bubble, was $13.1 billion yesterday.
In November, NetApp’s enterprise value fell to 5.7 times its earnings before interest, taxes, depreciation and amortization, a four-year low, data compiled by Bloomberg show. The company’s Ebitda multiple as of yesterday was 8.9 times.
NetApp is releasing its fourth-quarter earnings for the period ending April 26 on May 21.
Elliott, based in New York, has a history of pressing technology companies to make deals. The firm lobbied BMC Software Inc. last year to consider a sale, a goal realized earlier this month with the announcement of the company’s $6.9 billion takeover by Bain Capital LLC, Golden Gate Capital and other firms.
Elliott also has pressed for change at Compuware Corp., offering to buy the business-software maker for $2.3 billion in December.
The hedge fund has also made headway in other industries. Hess Corp., an oil company, said today that it’s ending a four-month proxy fight with Elliott, adding three of five board nominees put forth by the activist investor.
Elliott’s pressure comes at a time when new technologies threaten NetApp, which has recently completed an overhaul of its operating system for its storage computers, called OnTap.
While NetApp has specialized in systems that use disk drives, the hardware maker has yet to start selling products based on higher-performance electronic “flash” storage.
Options traders have increased bullish bets on NetApp in the past two months. The number of outstanding calls giving the right to buy the stock rose 76 percent since March 15 to 348,921 on May 14. That compares with a 62 percent increase to 292,360 in ownership of puts to sell the stock.
“NetApp options activity the last few weeks has positioned for an upside move in shares,” Joe Kunkle, founder of OptionsHawk.com, a Boston-based provider of options-market data and analytics, said in an e-mail. The buying “indicated a large player was at work in the name,” he said.
Notable trades included 5,000 September $36 calls on April 23, 8,000 bullish contracts with the same expiration at the beginning of May as well as the accumulation of various June call options at strikes as far out as $40, according to Kunkle.
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