Teradata’s Rolodex May Lure Cisco to HP: Real M&A

Teradata Corp. could take a cue from dealmaking customers Comcast Corp. and Procter & Gamble Co. by inviting a deal of its own.

The $7.4 billion maker of technology for analyzing consumer and product information fell 18 percent in the past year amid concern rivals will erode market share. After the decline, a purchase of Dayton, Ohio-based Teradata would be a cheap way for larger software makers to increase revenue from data storage and analysis, said Pacific Crest Securities. A sale, possibly spurred by an activist, could draw Cisco Systems Inc. or Hewlett-Packard Co., Susquehanna International Group LLP said.

With its still-competitive data warehouses and a roster of customers that includes EBay Inc. and Coca-Cola Co., Teradata could command about a 30 percent premium in a takeover, Summit Research Partners LLC said. Or, Teradata could make an acquisition to add more next-generation technology and boost sales growth, said Jefferies Group LLC. Any type of transaction would set Teradata on a similar course as clients such as Comcast and P&G, which are doing deals such as mergers and asset sales to pursue growth and extract value.

“If you look at their customer list, they have the best of the best,” Srini Nandury, a managing director at Summit Research in Summit, New Jersey, said in a phone interview. “It’s got a very good asset which is undervalued right now.”

Mike O’Sullivan, a representative for Teradata, said the company doesn’t comment on speculation.

Under Pressure

Teradata’s earnings have come under pressure recently as businesses postpone data-warehousing investments to evaluate new approaches to storing and refining information, said Joe Wittine of Longbow Research. The company reported sales growth of just 1 percent last year, the worst since 2009.

Results should rebound as the economy improves and executives better understand the different technologies for analyzing and maintaining data, Wittine said.

“It’s important and it hurts growth but none of these technologies are Teradata killers,” he said in a phone interview.

New tools such as Hadoop, which manages unstructured data such as tweets and videos, will end up being more complementary than cannibalistic, said Brad Reback of Stifel Financial Corp. It’s difficult to extract information from Hadoop so data that’s refined by the new technology may still need to be analyzed on a Teradata platform, he said.

Industry Yardstick

Teradata’s clients tend to stick with the technology because it generates a good return on their investment and there are few other companies that “do the stuff that these guys do,” Nandury of Summit Research said. “Everybody actually benchmarks against these guys.”

Buyers willing to bet Teradata can withstand the entry of different data-management tools can buy it now at a discount to peers, according to Jesse Hulsing of Pacific Crest.

Teradata traded yesterday at 19.4 times earnings, trailing the median for U.S. infrastructure software and information technology services companies of more than $1 billion, data compiled by Bloomberg show.

“They are a very competitive solution in a strategic market,” Hulsing, a Portland-based analyst, said in a phone interview. “It’s a big chunk of revenue at a pretty reasonable price.” Teradata generated $2.7 billion in total revenue last year.

The shares fell 3 percent to $44.71 today.

Activist Push?

The company could get a push from an activist to explore a sale, said Derrick Wood, a San Francisco-based analyst at Susquehanna. Cisco or Hewlett-Packard, which aren’t as strong in data warehousing, would be possible candidates for acquiring it, he said in a phone interview.

Hewlett-Packard Chief Executive Officer Meg Whitman may soon need to do deals after spending last year trying to boost profitability and repair the company’s balance sheet, analysts and investors said last month. The company’s 2011 purchase of Autonomy Corp. resulted in an $8.8 billion writedown.

Representatives for San Jose, California-based Cisco and Palo Alto, California-based Hewlett-Packard declined to comment when asked if their companies would be interested in buying Teradata.

Big Target

Suitors may prefer to wait and see how new technology like Hadoop is received by customers before contemplating a takeover of Teradata, said Wittine of Longbow. With an enterprise value of $6.9 billion, Teradata also would be a sizeable target, which limits the number of buyers, he said.

Technology firms may decide buying a company focused on unstructured data is a better move than acquiring a more traditional information-warehousing provider such as Teradata, according to Aaron Schwartz of Jefferies.

Unstructured data is “really where the growth in the market is,” Schwartz said in a phone interview from New York.

Some investors are betting against Teradata. About 12 percent of the company’s shares outstanding were sold short as of April, about double where it was at the start of the year, according to the latest data compiled by Markit. In a short sale, traders sell borrowed stock on the assumption the price will decline, allowing them to make money by buying it back at a lower price.

Given the changes in the industry, it may make more sense to look at Teradata as a possible acquirer of Hadoop-like technologies as a way to adapt to a changing market, he said.

“Is their product portfolio really equipped five or 10 years out?” Schwartz said. “If it’s not, they may have to potentially look at doing a larger transformational acquisition.”

Still Compelling

Even so, the company’s technology is still competitive and widely used, said Nandury of Summit Research. A customer base that includes DirecTV and Berkshire Hathaway Inc.’s railroad Burlington Northern Santa Fe could help Teradata command about $60 to $65 a share in a takeover, he said. That’s at least a 30 percent premium.

“If there’s any reason why somebody wants to acquire them, it’s basically because it’s a very compelling technology,” the analyst said. “If somebody like Cisco comes in, people are going to freak out. People are going to freak out and then there could be a bidding” war.

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