Riverbed Pays Up For Its Next Shot At Growth

By Stephen D. Simpson, CFA | October 30, 2012 AAA

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.

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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.

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