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Tickers in this Article: PKTR
Shareholders are notorious for being short-sighted when it comes to approving buyouts, which was the fuel behind the private equity boom last year. The number of such buyouts may have dramatically decreased due to the lack of available credit, but strategic buyers are now coming out in force to pick up companies on the cheap in a down market.

One such company that has attracted several interested strategic and financial buyers is Packeteer (Nasdaq:PKTR). The networking software company received a surprise $5.50 per share buyout offer on March 5 from Elliott Partners that eventually blossomed into a full-fledged review of strategic alternatives and a realization that shares are worth much more. (To learn the key players in the strategic acquisition game, check out M&A Competition is Cutthroat For Acquirers.)

The 'Dear John' Letter
Packeteer rejected Elliott's buyout offer and gave several reasons why shareholders should hold onto their shares. First, the offer contains 15 conditions that must be met before any transaction could be consummated. Among these were vague clauses that enable Elliott Partners to walk if any changes occur in the company's "reasonable judgment" that could be materially adverse.

Packeteer also suggested that Elliott's offer is coercive to shareholders and creates a liquidity risk for those that do not tender their shares. Since there is no guaranteed second-step merger following the tender offers, shareholders who do not tender could be forced to accept a lower per-share base price when the second step finally does take place.

Finally, Packeteer noted that the offer doesn't reflect the synergy value that may be obtained from a strategic combination. History has shown that these buyers can afford to pay a lot more than financial buyers like Elliott Partners. But is there more interest in the company? (To learn more, read Mergers And Acquisitions: Doing The Deal.)

Exploring All the Options
A Schedule 14D-9 filing with the SEC revealed that Packeteer had already been engaged in a review of its strategic alternatives. In fact, the company's senior management has participated over the last several months in a series of meetings and discussions with a six different parties that have expressed interest.

The regulatory filing went on to detail that two of these parties had already submitted non-binding offers higher than Elliott's $5.50 per share offer while two others are considering making offers in the near future. This burst of interest sent shares higher on speculation that these strategic acquirers may be willing to pony up far more than $5.50 per share.

Just how much higher?

The Shocking Valuation
Packeteer shocked investors when it issued much higher than expected guidance for 2008 in the same regulatory filing to support its argument that $5.50 substantially undervalues the company. Management argued that the real value of the company should be closer to $7.93 per share - a full 44% higher than the current buyout offer!

The company backed up this number by saying that it now expects to earn $15 million in net income in 2008 on total revenues of $176 million. This equals out to 39 cents per share compared to a street consensus of just 19 cents per share. Using the same pre-buyout-rumor multiple of 20.3-times earnings, this means an implied valuation of $7.93 per share. (To get started on your own valuations, check out Investment Valuation Ratios.)

It is also important to note that this is the stand-alone value of the company and any offer to purchase - especially by a strategic buyer - should come in at a substantial premium.

Final Note
Packeteer shareholders are now faced with the potential of some significant upside. The existing $5.50 per share offer seems unlikely to go through given revelations found in a regulatory filing with the SEC along with a new poison pill. Meanwhile, the company insisted that it was worth at least $7.93 per share and has several other interested strategic buyers. Combined, these are some great reasons to take a look at this company!

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