Riverbed Pays up for its Next Shot at Growth
The ideal for every business (and investor) is to seamlessly transition from one growth opportunity to another, harvesting cash flow from older businesses and reinvesting it into new opportunities that can continue to expand the business. Not many companies can do this completely on their own, however, and must rely upon acquisitions to improve their growth prospects. That would appear to be the case with Riverbed Technology (Nasdaq:RVBD), as it has agreed to spend approximately $1 billion in cash and stock to expand into the fast-growing application performance management market.

Forex Broker Guide: Using the right broker is essential when competing in today's forex marketplace.

The Deal
Riverbed announced Monday that it had reached an agreement with Opnet (Nasdaq:OPNT) to acquire it for $1 billion in a combination of cash and stock. At $43 per share, Riverbed paid a 34% premium to Opnet's Friday closing price of $32.10.

Netting out the cash, Riverbed is assigning an enterprise value of $921 million to Opnet, which works out to a 4.7 times multiple on the average analyst estimate for fiscal 2013 revenue for Opnet. To fund the deal, Riverbed will be using about 50% debt, 35% cash and 15% stock - each Opnet shareholder will get $36.55 per share in cash and about 0.28 shares of Riverbed stock.

SEE: Mergers And Acquisitions: Introduction

An Expensive, but Arguably Necessary, Deal
Although paying a little less than five times revenue may not seem like an especially large premium (at least by the standards of tech and recent acquisitions by the likes of IBM (NYSE:IBM) or Oracle (Nasdaq:ORCL), a little further context is necessary.

What Riverbed really wants is Opnet's application performance management (APM) business, which makes up about two-thirds of Opnet's revenue and is growing around 30%. APM is a fast-growing business right now, with companies such as CA (NYSE:CA), Compuware (Nasdaq:CPWR), IBM and Dell (Nasdaq:DELL) (through its acquisition of Quest) already seeing solid demand for customers who use APM products to check code and monitor software for performance.

While Opnet's APM business is growing nicely (and should meaningfully build on Riverbed's existing Cascade business), the network performance management (NPM) business is not; not only does the business appear to be in a sort of "managed decline," it seems to be the source of recent underperformance. Strip out the NPM business, and the multiple Riverbed is paying jumps to about seven times revenue - not out of line with recent growth-oriented deals in the space, but not exactly a bargain either.

As for the "necessary" part of the deal, it would seem that this deal is an acknowledgment that Riverbed's core WAN optimization business has not only slowed, but is unlikely to regain prior growth rates. What's more, Cisco (Nasdaq:CSCO) has acknowledged WAN optimization as an area of weakness, and could look to regain share from Riverbed. There's nothing unusual about any of this ("trees don't grow to the sky" and all that), and Riverbed is hardly the first tech company to use acquisitions to boost its diversification and growth strategies, but the company hasn't always been the best at executing consistently across multiple product lines, so investors should recognize the risk here.

SEE: The Wonderful World Of Mergers

The Bottom Line
It's hard to fault Riverbed for doing what so many other tech companies ultimately do (buying in new growth opportunities with M&A). The multiple involved is a little high, but quality growth opportunities don't come cheap and Opnet looks to be one of the relatively few options that Riverbed had in terms of right size, right market and right growth prospects.

Riverbed is in a curious position right now. The stock has been weak this year, and although the company's September quarter was solid and analyst estimates have been moving up, there's still downside risk as WAN optimization does not seem like a top priority in a slowing IT market. I'd likely be more inclined to look at value-priced Cisco or beaten-up F5 (Nasdaq:FFIV) (which is itself facing worries over slowing growth in its core ADC market), but I do think this deal for Opnet makes Riverbed a more interesting long-term opportunity than it was just a week ago.

At the time of writing, Stephen D. Simpson did not own any shares in any company mentioned in this article.

Related Articles
  1. Mutual Funds & ETFs

    ETF Analysis: iShares MSCI USA Minimum Volatility

    Learn about the iShares MSCI USA Minimum Volatility exchange-traded fund, which invests in low-volatility equities traded on the U.S. stock market.
  2. Stock Analysis

    Should You Follow Millionaires into This Sector?

    Millionaire investors—and those who follow them—should take another look at the current economic situation before making any more investment decisions.
  3. Professionals

    What to do During a Market Correction

    The market has corrected...now what? Here's what you should consider rather than panicking.
  4. Mutual Funds & ETFs

    ETF Analysis: Vanguard Mid-Cap Value

    Take an in-depth look at the Vanguard Mid-Cap Value ETF, one of the largest and most popular mid-cap funds in the U.S. equity space.
  5. Mutual Funds & ETFs

    ETF Analysis: Schwab US Broad Market

    Take an in-depth look at the Schwab U.S. Broad Market ETF, an incredibly low-cost fund based on a wide selection of the U.S. equity market.
  6. Professionals

    Tips for Helping Clients Though Market Corrections

    When the stock market sees a steep drop, clients are bound to get anxious. Here are some tips for talking them off the ledge.
  7. Stock Analysis

    The Safest Stocks You Can Invest in Right Now

    These stocks are likely to hold up better than others in a bear market, but there's a twist.
  8. Investing Basics

    5 Reasons to Expect Lower Stock Returns

    Lower stock returns are likely here to stay for some time. Here are five reasons why.
  9. Investing Basics

    What to Cut From Your Portfolio Right Now

    Owning stocks may shortly become too scary for your portfolio. Here's why, and here are some alternatives.
  10. Personal Finance

    Careers: Equity Research Vs. Investment Banking

    Equity research is sometimes viewed as the unglamorous, lower-paid cousin to investment banking. In this article, we compare the two careers.
RELATED TERMS
  1. Hard-To-Sell Asset

    An asset that is extremely difficult to dispose of either due ...
  2. Sucker Yield

    When an investor has essentially risked all of his capital for ...
  3. PT (Perseroan Terbatas)

    An acronym for Perseroan Terbatas, which is Limited Liability ...
  4. Ltd. (Limited)

    An abbreviation of "limited," Ltd. is a suffix that ...
  5. BHD (Berhad)

    The suffix Bhd. is an abbreviation of a Malay word "berhad," ...
  6. Impact investing

RELATED FAQS
  1. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  2. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  3. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  4. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  5. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>
  6. What happens to the shares of stock purchased in a tender offer?

    The shares of stock purchased in a tender offer become the property of the purchaser. From that point forward, the purchaser, ... Read Full Answer >>

You May Also Like

COMPANIES IN THIS ARTICLE
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!