NetApp Near Record-Low Value May Lure Suitors: Real M&A
NetApp Inc. (NTAP), viewed as a takeover target for almost a decade, is becoming increasingly attractive for potential acquirers as the data-storage company nears its cheapest valuation on record.
With a market capitalization as high as $21.9 billion last year, NetApp has lost 51 percent of its value as sales disappointed and it gained less market share than larger rival EMC Corp. (EMC) The almost $11 billion company, with a record $4.1 billion in net cash, was valued last week at 6.2 times earnings before interest, taxes, depreciation and amortization, approaching its all-time low of 5.1 reached during the financial crisis in 2008, according to data compiled by Bloomberg.
The maker of hardware and software to more efficiently store and access data may finally be affordable enough to draw interest from International Business Machines Corp., Oracle Corp. (ORCL) or Cisco Systems Inc. (CSCO), said NetApp shareholder Thrivent Financial for Lutherans. The Sunnyvale, California-based company would likely command as much as $45 a share in a takeover, said FBN Securities Inc., a 53 percent premium to last week’s close.
“NetApp is very cash rich and has a phenomenal balance sheet,” Brian Marshall, a San Francisco-based analyst for ISI Group, said in a phone interview. “2011 was a tough year for NetApp. It’s a wounded bird, so people can get it on the cheap.”
Today, NetApp shares rose 1.6 percent to $29.90, the seventh-biggest increase among 70 information technology companies in the Standard & Poor’s 500 Index.
Dave Black, a spokesman for NetApp, declined to comment on whether the company would consider a sale or has been approached by buyers.
Through last week, the 51 percent decline in NetApp’s shares since last year’s peak market value on Feb. 11, 2011, was the sixth-steepest in the S&P 500 Information Technology Index.
On May 24 the stock tumbled 12 percent after NetApp said fiscal first-quarter revenue will be $1.4 billion to $1.5 billion, trailing analysts’ estimates at that time for $1.6 billion. The company cited the “deteriorating macro-environment” in Europe and the “slow-growing U.S. economy.”
“They’ve kind of been serial underperformers with respect to delivering on their guidance over the last 18 months,” Mark Moskowitz, an analyst with JPMorgan Chase & Co. in San Francisco, said in a phone interview. “A lot of investors are like, ‘I don’t need this.’”
Investors have become concerned about overall growth in the storage market, increased competition and management’s ability to accurately forecast, Moskowitz said.
Hopkinton, Massachusetts-based EMC, the world’s biggest maker of storage computers, controlled 31.7 percent of global disc-storage-system revenue in 2011, up 6.8 percentage points from 2009, according to data from Stamford, Connecticut-based Gartner Inc. NetApp’s market share increased only 3.2 percentage points to 11.5 percent.
In the wake of its disappointing forecast, NetApp’s Ebitda multiple fell to 6 on May 24, the lowest since November 2008, two months after Lehman Brothers Holdings Inc. collapsed in the biggest bankruptcy in history. Excluding that period of the financial crisis, last month’s multiple would be an all-time low, data compiled by Bloomberg show.
At the same time, NetApp boosted its cash to a record $5.4 billion and only has $1.3 billion in debt. That means a buyer would be getting a company with net cash that’s the equal to 39 percent of its market value.
“Just from a pure investment basis, it makes a lot of sense because of how cheap it’s trading and still how good the cash flow is,” Tim Cunningham, who helps oversee $83 billion at Thornburg Investment Management Inc. in Santa Fe, New Mexico, said in a phone interview. The company’s potential free cash flow yield “is pretty attractive, and so from that standpoint it would be interesting as a takeout candidate.”
A takeover would make sense for IBM (IBM), Oracle or Cisco as businesses require more data-storage capacity and turn to NetApp’s network-attached storage, or NAS, which gives quick access to frequently used files, Peter Karazeris, a Minneapolis-based analyst at Thrivent, said in a phone interview. Thrivent, which oversaw $75.8 billion as of February, owned about 877,000 NetApp shares as of March 31, according to a regulatory filing.
While NetApp’s largest competitor controls almost three times more market share, EMC has an almost $49 billion market capitalization that makes it too large for an acquisition, said ISI’s Marshall.
“NetApp is a good, bite-size target for an IBM or an Oracle to acquire,” Marshall said. “Both strategically and financially the deal makes perfect sense.”
While Cisco is the “king of networking,” it needs to add storage systems because hardware, storage and networking are all converging in the technology industry, said Shebly Seyrafi, a New York-based analyst at FBN.
“Until recently, NetApp’s had a very high valuation, which has probably deterred Cisco from making that bid,” Seyrafi said in a phone interview. “But considering the storage landscape has changed and that NetApp’s now trading at a much more attractive valuation, Cisco must be salivating here with the stock where it’s at.”
Mike Fay, a spokesman for Armonk, New York-based IBM, wasn’t reachable by phone and didn’t respond to an e-mail seeking comment.
After subtracting net cash, NetApp’s enterprise value was only $6.6 billion as of June 1, which makes it more digestible for a buyer, according to Thornburg’s Cunningham.
FBN’s Seyrafi said NetApp would probably consider a takeover bid of $38 to $45 a share, implying a price at least 29 percent higher than last week’s closing level of $29.44.
While Thrivent’s Karazeris said $45 a share would be enough for the board to consider a deal, the company is worth at least $50 a share in a takeover, according to ISI’s Marshall.
The size of NetApp’s market value and its hardware-based business model will deter potential suitors such as IBM and Cisco even at the lower stock price, said Kevin Stadtler, the founder of investment advisor Stadtler Capital Management LLC in Fort Worth, Texas.
IBM is focused on buying software companies for less than about $1.5 billion, Chief Financial Officer Mark Loughridge said at a conference last month. After announcing the $5 billion purchase of software maker NDS Group Ltd. in March, Cisco Chief Executive Officer John Chambers said the company was “moving to a more software-based model.”
While Oracle’s share of the storage market has declined to 1.7 percent, the world’s largest maker of database software wouldn’t be an interested buyer because it already has a partnership to resell NetApp gear, said Doron Eisenberg, a Baltimore-based partner with Brown Advisory, which owned 6.3 million shares of NetApp as of March, according to a regulatory filing. Eisenberg said he doubts NetApp management would consider bids at its current price.
“This is one of the most credible management teams I follow,” Eisenberg said. “I’m sure they wouldn’t be interested in selling at these valuation levels.”
NetApp’s management could eventually take the company private if its stock remains undervalued and no suitor emerges, said Thrivent’s Karazeris.
Still, potential buyers may decide to act before the share price has a chance to rise, said FBN’s Seyrafi.
“At these levels, I think the company’s a very attractive target,” Seyrafi said. “A potential acquirer may say, ‘We may need to strike sooner before they beat that lower bar or come out of their seasonally weak quarter and people realize that this is still a high quality company.’”