Teradata’s Unhappy Investors May Spur Search for Buyer: Real M&A

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Of all the hot targets in tech, Teradata Corp. may not be at the top of the list. Its cheap stock could still attract a buyer.

The $6.2 billion big-data software maker has valuable technology and an impressive customer list including Coca-Cola Co. and EBay Inc., yet its stock has underperformed for years. That’s why one shareholder is urging Teradata to pursue a sale.

“Consider the difficult road ahead as a stand-alone” entity, Matrix Asset Advisors Inc.’s David Katz wrote in a letter to the board last month. Given the “scramble” for big-data offerings, there could be multiple interested acquirers, he said in an interview last week, citing Oracle Corp., International Business Machines Corp. and SAP SE as examples.

Teradata is valued at a 33 percent average discount to other software companies, according to data compiled by Bloomberg. It also has the ninth-highest short interest among members of the Standard & Poor’s 500 Index, and earnings have been disappointing. While there’s plenty of evidence to support the call for a strategic review, Derrick Wood at Susquehanna International Group says it may require an additional push from some larger shareholders. Matrix’s stake is less than 1 percent.

“It’s ripe for activism and ripe for a potential shakeup or takeout,” said Todd Lowenstein, a Los Angeles-based senior fund manager at HighMark Capital Management Inc., which owns Teradata stock among the $16 billion of assets it oversees. “Teradata’s not the sexy, hot product anymore, but data analytics is a big area. It would probably be attractive to a strategic or financial buyer, especially at these multiples.”

Three Letters

Matrix Asset Advisors has now sent three letters to the company urging it to try to find a buyer.

Teradata’s executives and board have received the letters and “welcome the views of its shareholders,” Mike O’Sullivan, a spokesman for Teradata, said by phone. “Our board and management team are keenly focused on creating value for all our shareholders and on our goals of executing on our strategy.”

Teradata supplies software and hardware to support big data, the vast amount of information amassed by businesses that requires powerful computers to store and analyze it. The company was spun off from ATM maker NCR Corp. eight years ago and before that was part of AT&T Inc.

Sinking Valuation

Teradata’s valuation sank to a five-year low last May and has stayed around that level ever since. On Tuesday, its enterprise value was 8.6 times trailing 12-month earnings before interest, taxes, depreciation and amortization. That compares with an average multiple of about 13 for the Standard & Poor’s 500 Software & Services Index, data compiled by Bloomberg show.

The company’s stock has lost 27 percent in two years while its peers rallied 44 percent.

“Our hope is that other shareholders that share our frustration and are larger can weigh in, either behind the scenes or visibly,” Katz of Matrix Asset Advisors said in a phone interview last week.

So far, some analysts and investors agree, while others don’t. Either way, analysts don’t expect much from the stock over the next year. They estimate Teradata shares will rise about 2 percent over the next 12 months, on average, according to estimates compiled by Bloomberg. Only about a quarter of them recommend investors purchase the stock, the data show.

Teradata shares rose 1.3 percent to $42.74 on Tuesday in New York.

Stifel Financial Corp.’s Brad Reback doesn’t see Teradata as a good target for activism because it’s already “fairly well run” and “has consistently allocated a healthy amount of capital to buying back stock.”

Falling Short

Still, the shares are depressed because the company keeps falling short of its long-term growth goals, said Wood, a San Francisco-based analyst for Susquehanna. Sales were flat or down in five of the past eight quarters amid a squeeze on information-technology budgets. Businesses have had to shift their focus to cybersecurity threats and preventing hackings, crowding out funds for other IT products like Teradata’s.

It’s a “cyclical trough,” and over the next two to three years, corporations will start spending on data warehousing and analytics again, Wood said in a phone interview. After revenue sags again this year, analysts project growth will return in 2016 and pick up steam a couple of years after that.

“I can understand the investor frustration,” Wood said. “We’ve seen the stock be stuck in the penalty box. If there’s merit with this shareholder around what they think the potential value of the company is, then it would behoove the board to consider all strategic alternatives out there.”

Buyout Interest

The company may be a leveraged-buyout candidate given the cash it throws off, he said. Private-equity suitors look for highly cash-generative businesses because they can use the money to pay down debt that financed the LBO.

Teradata generated about $127 million of free cash flow on average in each of the past 10 quarters, data compiled by Bloomberg show. The measure refers to the cash that’s left after deducting capital expenditures, such as equipment upgrades.

Other legacy-software companies Tibco Software Inc., BMC Software Inc. and Compuware Corp. were also recently purchased by private-equity firms after becoming activist targets.

Nice Fit

Teradata’s $6.2 billion market value would also be a nice fit for one of the larger software makers, Lowenstein of HighMark said. It’s a fraction of the size of Oracle and IBM, both $150 billion-plus companies, and even $52 billion EMC Corp. and $59 billion Hewlett-Packard Co.

It could “fill in the portfolios that some of these larger guys will need,” Lowenstein said. “It’s in a pretty decent wide-moat business, and they’re doing the right thing by embracing Hadoop.” Hadoop, which manages unstructured data such as tweets and videos, has sparked debate over whether the new tool will cannibalize Teradata or be complementary.

Even if Hadoop doesn’t hurt Teradata, acquirers’ deal desires seem to be moving away from the kind of offerings it provides and toward faster-growing security and mobile products, said Josh Strauss, co-manager of the Appleseed Fund, which owns Teradata. He’s still bullish on the company, though, and thinks the stock can climb more than 40 percent to $60 on its own within the next 18 months.

“Would I love to see them get taken out? Sure. Am I counting on it? No,” Strauss said in a phone interview from Chicago. “There is a lot of value here and it would make sense. But the question is, can you make the math work, because it’d be a pretty big acquisition and there are really only a handful of strategic buyers who would do it.”