Companies deal with fading growth prospects in different ways. Some companies, like F5 (Nasdaq:FFIV) try to use relatively small-scale M&A and their own internal R&D to develop new products and enter into new markets. Others, like Cisco (Nasdaq:CSCO) and Riverbed (Nasdaq:RVBD) take bigger swings on the M&A front, putting more of their shareholders' capital at risk in the hopes of bigger long-term rewards. While the growth prospects for WAN optimization are no longer as bright as they once were, Riverbed hopes to benefit from a more comprehensive suite of technologies and solutions for the network performance market, and the stock may just be cheap enough to be worth consideration.

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Waiting For Synergies To Kick In
When Riverbed reported 10% organic revenue growth for the first quarter back in April, that was actually a pretty strong report relative to what most of its peers in the IT hardware space managed. WAN optimization growth of 6% was not exactly thrilling, but then other hardware incumbents in areas like application delivery controllers (ADC) (F5), security (Check Point (Nasdaq:CHKP and Cisco), switching/routing (Juniper (NYSE:JNPR) and Cisco), and storage (EMC (NYSE:EMC) saw pretty unimpressive performance as well.

Importantly, the recently-acquired OPNET business seemed to do pretty well, with revenue of $52 million. Overall, Riverbed's network performance monitoring business was up 42% (excluding OPNET), with solid growth in ADCs (off of a low base).

Operating synergy is another story, though. While Riverbed's gross margin did improve more than a point from the year-ago level, operating margin declined more than three points from last year and more than five points from the prior quarter. Given that Riverbed has had operating/execution issues in the past, it is very important for the stock's valuation that management show that it has a handle on the integration of the OPNET business and that it offers more than just a bigger revenue base.

SEE: A Primer On Investing In The Tech Industry

Building For The Future
One point that I've made repeatedly when talking about tech companies, particularly those more skewed towards hardware, is the importance and difficulty of building a second act. That is, taking the company's initial success and using it to develop products and markets that can allow the company to continue to grow at an above-market rate on into the future.

WAN optimization is slowing. While Riverbed has actually been doing pretty well from a market share standpoint relative to Cisco, Juniper, Blue Coat, and F5, the market is nevertheless maturing and growth is slowing. That makes the company's transition towards becoming a broad network performance monitoring/management company all the more important.

Riverbed paid a lot for OPNET and there could be a lot of strong natural synergies between the two businesses, but companies like Cisco, CA (Nasdaq:CA), IBM (NYSE:IBM), and Hewlett-Packard (NYSE:HPQ) will be aggressively competing for at least some of the same business. What's more, as previously mentioned, Riverbed doesn't have the best history when it comes to sales force management/execution or launching/updating product families. In my mind, then, that raises a very valid question as to whether management will succeed in fitting these pieces together and creating a situation where the new Riverbed is more than the sum of its parts.

SEE: Evaluating A Company’s Management

The Bottom Line
Not unlike with F5, I do have some worries that the trend of outsourcing more enterprise IT functions to providers like Amazon (Nasdaq:AMZN) (Amazon Web Services or AWS) will impair the market growth potential in Riverbed's core markets. That said, while I don't think the network performance monitoring/management market is necessarily a hugely high-growth market over the next five to 10 years, I do believe it will be a pretty steady one, and I do believe that will support high single-digit growth for Riverbed.

All told, I'm looking for long-term revenue growth of over 9% for Riverbed, helped to a significant degree by the OPNET deal. If the integration fails (or underwhelms), that's a significant source of downside risk. I do expect the new business to be less profitable for a cash flow perspective, and so my free cash flow (FCF) growth assumption is slightly weaker (about 8%).

Altogether, that suggests a fair value to me of more than $21 per share, which is well above both the average sell-side price target (around $17) and the current price (around $15). Riverbed's past performance and execution issues do give me reason for pause (and do lead me to give the company a higher discount rate than some of its peers), but it's hard not to find today's price pretty compelling from a long-term perspective.

At the time of writing, Stephen D. Simpson owned share of EMC.