On the face of it, Terayon Communications Systems’ (Nasdaq: TERN) share is not behaving like that of a company in negotiations for its acquisition by an international giant. The share “soared” 0.3% on Tuesday and was flat yesterday, bringing it gain since the beginning of the month to 18%, just like many other companies in the US for which no acquisition is contemplated. Not something to write home about.
Nevertheless, behind the scenes, capital market sources say, quite a few things are happening at the company. It is believed that Terayon, which provides digital video applications and broadband access solutions for households, is in advanced negotiations for its sale to a large company. As far as can be seen, three companies are involved in the process: Cisco Systems (Nasdaq: CSCO), which in recent months was in talks to acquire Terayon, before dropping the idea, but has now apparently regained interest; Scientific Atlanta (NYSE: SFA), which has a $5.5 billion market cap; and Tandberg Data ASA, which is traded in Oslo at a market cap of $1.8 billion. Two more companies were mentioned yesterday as possible candidates to acquire Terayon: Harmonic (Nasdaq: HLIT) and Thomson Corporation (NYSE, TSX: TOC). In other words, it looks like Terayon is for sale, and there are quite a few possible buyers. It all depends on the price.
Terayon’s current share price is $3.90, reflecting a market cap of $302 million. Estimates of the share price being discussed in the negotiations range from $4, with almost no premium, to $5, a premium of about 28% on the current market price. The market cap range that these prices reflect is $310-385 million. No response from Terayon to the report was forthcoming.
Zaki and Shlomo Rakib, who founded Terayon in 1993, currently each own 5.4% of it, including currently exercisable options, or 3.9% excluding options. They no longer actively manage the company; Zaki Rakib is chairman, and Shlomo Rakib is a director. Zaki Rakib recently bought a house on Galei Hatchelet Street in Herzliya, a prestigious location, for $22 million from Martin Schlaff, and he plans to move to Israel.
Terayon has $105 million cash, and its equity is $55 million. One thing that will be remembered to the company’s credit is that it succeeded in raising $500 million in convertible bonds just before the tech bubble burst, which enabled it to survive the crisis period.
Terayon is not an Israeli company, but it has deep Israeli roots. The company has 200 employees worldwide, including ten in Israel. It recently fired 30 employees, and has retained only marketing and technical support departments in Israel (Terayon began 2005 with 37 employees in Israel).
It is difficult to forget how Terayon was run during the bubble years. The company had no hesitation in declaring its intention of becoming a one-stop shop in broadband communications. Zaki Rakib mentioned more than once Cisco’s successful model as a source of inspiration. The company went on an acquisition spree in the late 1990s, picking up ten technology companies, mostly Israeli, in the process, at a cost of just under $950 million in cash and shares. None of these acquisitions did much for the business of Terayon, which had to write off goodwill amounting to $500 million after the bubble burst in 2001.
The decline was felt in both the company’s performance and investors’ confidence, and its share plummeted from $145 to less than $2. Terayon’s revenue currently runs at $30 million, and it reported a $508,000 loss in the second quarter. Its accumulated losses currently exceed $1 billion.
Terayon is now in the middle of a transition from being a provider of cable modems with a focus on data communications, to a focus on video. Analysts believe that only in 2006 will it be possible to know whether Terayon has managed to break into the latter market.
The values being discussed in the market testify to the enormous destruction of value in the company in recent years, and its inability to reach critical mass in its various markets.
Published by Globes [online] - www.globes.co.il - on September 22, 2005