Deals

Gillian Tan is a Bloomberg Gadfly columnist covering deals and private equity. She previously was a reporter for the Wall Street Journal. She is a qualified chartered accountant.

Elliott Management Corp., the activist investor with a penchant for undervalued technology companies, is at it again.

After successfully agitating for the sales of Lifelock Inc. and Mentor Graphics Corp. in 2016, Elliott on Monday unveiled a 15.3 percent stake in Gigamon Inc., a company that makes network-technology products, some of which monitor traffic. Elliott, following the script it's used before, said it intends to encourage management to undertake a strategic review including a potential sale. The Santa Clara, California-based company's shares soared 17 percent in response.

Laggard
Since its initial public offering, Gigamon's shares have rarely outperformed benchmark indexes
Source: Bloomberg

Longtime investors who have been disappointed by the company's underperformance against major indexes since its 2013 IPO, or those simply flocking into Gigamon on Elliott's lead have valid reasons to be hopeful. On top of the investment firm's track record in effectively facilitating takeovers, there has been healthy buyer interest in the sector in which Gigamon operates. Most recently, network testing and security company Ixia was sold to Keysight Technologies Inc. for about $1.6 billion in a deal that closed last month. Another rival, VSS Monitoring Inc., was acquired by Danaher Corp. back in 2012, and later sold to NetScout Systems Inc.    

Valued at around 3.2 times its projected 2018 sales, Gigamon looks a little more expensive than some of Elliott's past targets. But it's also grown at a faster clip -- over the past five years, its revenue has grown at a compound annual rate of roughly 26 percent. It's notable that Ixia, which had a five-year compound annual growth rate of roughly 3 percent, ultimately fetched roughly 3 times its estimated 2017 sales, so any deal for Gigamon would be expected to come at a premium to that.

Facing the Music
Quarterly earnings have resulted in large swings in Gigamon's shares, and avoiding public scrutiny could be a reason that spurs management to consider a deal
Source: Bloomberg

There's uncertainty about whether Gigamon can keep up its rapid pace of growth, and that's caused the stock to tumble some 30 percent from its record high in November. But if it's not held accountable to quarterly earnings and is able to deliver decent enough annual growth, that should still justify interest from strategic buyers including Cisco Systems Inc. and Hewlett Packard Enterprise Co. Both have slower-growing networking product arms, withing which Gigamon could be integrated.

Can't Beat That
Gigamon's annual growth rate far exceeds that of Cisco's core network switches unit
Source: Bloomberg
*Cisco's network switches revenue grew 0.05% in 2016, which is why nothing can be seen

The company -- which has no debt -- could also draw in private equity firms, for whom it's a more digestible size versus, say, a buyout of another Elliott investment, Citrix Systems Inc. (athough we at Gadfly do believe that megadeal is possible). Plus, any buyer could bolster Gigamon's earnings by reducing the company's sales and marketing expenses as a percentage of revenue which, at nearly 40 percent in 2016, could do with a trim.

How quickly could talks evolve? The takeovers of Mentor Graphics and Lifelock came roughly two and five months, respectively, after Elliott disclosed its stakes. Assuming Gigamon's management is receptive to its newest shareholder and any ensuing interest, the deal timing could be even swifter. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

  1. Ixia also lured in potential private equity buyers, with firms including Thoma Bravo, Silver Lake and Vista Equity Partners mulling final bids for the company, Bloomberg News reported in January. And Silver Lake was in talks to possibly bid for it alongside rival Viavi Solutions Inc.

To contact the author of this story:
Gillian Tan in New York at gtan129@bloomberg.net

To contact the editor responsible for this story:
Beth Williams at bewilliams@bloomberg.net