In the excitement over the acquisition of Shopping.com (Nasdaq: SHOP) last Thursday, another interesting acquisition on the same day went unnoticed in Israel. Citrix Systems (Nasdaq: CTXS), which has a $4 billion market cap, bought private US company NetScaler for $300 million. What’s interesting about it? The totally unexpected acquisition of NetScaler, a competitor of Radware (Nasdaq: RDWR; TASE: RDWR), was by a company that has not been active at all in this market. Citrix’s acquisition follows Juniper Networks’ (Nasdaq: JNPR) recent acquisition of two private companies in Radware’s field, announced on April 27, which pushed the Radware share down 6%.
Radware’s market is in the headlines, with many mergers and acquisitions. We investors see only the official announcements that a deal has been closed, but apparently these are preceded by horse trading, because there are quite a few large buyers loaded with cash, such as Cisco Systems (Nasdaq: CSCO) and Juniper, for every private company in the market, not to mention companies that have only just emerged, or are still emerging, from the telecommunications crisis, like Lucent Technologies (NYSE: LU) and Nortel Networks (NYSE: NT), and those wanting to enter the field, like Citrix, and even Mercury Interactive Corporation (Nasdaq: MERQ) and others. The private companies in the field are disappearing, swallowed up by the large ones, and I predict that the companies making the acquisitions will soon get around to the public companies, such as Radware, Packeteer (Nasdaq: PKTR), and perhaps even larger ones, like F5 Networks (Nasdaq: FFIV), unless F5 itself acquires companies smaller than itself.
In general, Radware deals in applications for managing information traffic on IP networks, mainly on an enterprise’s Internet site, while protecting and expediting activity. Given huge potential customers that have sprung up in recent years, such as Google (Nasdaq: GOOG) and eBay (Nasdaq: EBAY), plus thousands of smaller companies whose traffic consists of real sales and profits, it’s no wonder that everyone wants a piece of the pie. Incidentally, eBay is an important customer of Radware, and NetScaler says Google is one of its important customers. Merrill Lynch thinks that Citrix will now compete head to head through NetScaler, mostly against F5.
Last Wednesday, at the Lehman Brothers conference in New York for communications companies, NetScaler’s presentation was by one of the company’s VPs, who apologized at the beginning for the absence of the CEO “for urgent business.” Next day, the urgent business turned out to be the sale of the company to Citrix for $300 million, including $135 million in cash. The price reflects a sales multiple of almost eight. If this multiple is applied to Radware, and its cash is added to the price, we get a price of $1 billion, compared with the company’s current $420 million market cap. When Radware CFO Meir Moshe was asked at the CIBC conference three weeks ago about a possible sale of the company, he said that it was not on the agenda, but that if it were, the price would be much higher than the company’s current market cap.
NetScaler’s presentation was very impressive. Although the company is very small, it claims that 75% of Internet users pass through its systems daily in some way. These systems are installed on large sites, such as Google, Amazon.com (Nasdaq: AMZN) and Yahoo! (Nasdaq: YHOO). In one of its presentation slides, NetScaler asserts that it came first in a customer satisfaction survey of equipment vendors for communications layers 4 to 7. NetScaler claims that 76% of vendors were very satisfied with it, compared with 36% for Cisco and only 15% for Radware.
What investors did on Thursday and Friday to the share of Citrix, which is actually a communications networks software company, will not encourage other software companies, such as Check Point (Nasdaq: CHKP) and Mercury, to acquire hardware companies, which usually depress gross profit margins. Incidentally, Radware has a gross profit margin of 82%, which is usually high for a hardware company. The Citrix share plummeted 13% in the past two days, because investors didn’t like being diluted, the entry into hardware, and the high price paid for NetScaler, which is still losing money. Merrill Lynch security software analyst Edward Maguire, known for his warm recommendations for Check Point, recommends “Buy” for Citrix, with a target price of $27. He praises Citrix management for its courage in sacrificing short-term targets in order to enter a new strategic field, which will begin to make a large contribution next year.
It’s very rare to read a guru’s letter to investors that begins, “I made one mistake with our pure-play on the WiMAX revolution. I got in a little early.” That’s what Tobin Smith wrote yesterday to thousands of subscribers and non-subscribers, referring to Alvarion (Nasdaq: ALVR; TASE: ALVR). In the winter of 2005, Smith was confident that the share’s fall from its $16 peak was an opportunity, and he pushed investors to buy at $14, saying, “You'll kick yourself if you don't get in now.”
Smith now claims that it was the absence of Intel’s (Nasdsaq: INTC) WiMAX chip that caused Alvarion’s problems, and that the April launch of the chip has already raised the share 13% above its bottom. “And this could be your last chance to get in below 10 bucks, for a ride to $20 or beyond,” he writes. Smith asserts that the same thing happened to him with a field that is now a hit satellite radio. “We were a little early in satellite radio, too - but now our Sirius Satellite Radio stock is UP 500%!,” he says. In his weekly appearance on Saturday on the Fox television network, he recommended another Israeli share Teva Pharmaceutical Industries Ltd. (Nasdaq: TEVA; TASE: TEVA), only one day before the company issued a profit warning. Fortunately for Smith, anyone who bought the share yesterday did so after the profit warning.
I’m taking Smith’s advice this time, and adding Alvarion to my portfolio in place of Camtek (Nasdaq: CAMT), which has been too volatile in its quarterly results for my taste. It seems to me that the WiMAX field definitely has great potential starting next year. It won’t replace WiFi; it will complement it for ranges of an entire city, and not just in cafes and airports. I’m a little concerned about Alvarion’s results in the coming quarters, but I believe that the company’s most recent guidance was more conservative.
Published by Globes [online] - www.globes.co.il - on June 7, 2005