Merrill Lynch, now part of Bank of America, sees the main objective of a potential Radware Ltd. (Nasdaq: RDWR; TASE: RDWR) purchase of a Nortel division being the acquisition of the division's North American installed base and distribution channels.
Yet Merrill analyst Stanley Kovler maintains his "Underperform" rating on Radware, giving a price objective of $6.25 per share. Radware closed on Nasdaq yesterday at $5.78.
Kovler, referring to the "Globes" report of the deal, said he believes Radware is expected to acquire Nortel's application networking business, which Radware competes with.
At the $30-50 million price, he values the transaction at about 0.5-0.7 times Nortel's 2008 sales. Taking into account a steep decline in Nortel’s business recently, the figure may actually be closer to the total 2009 estimated sales. He notes that Radware itself is trading at about its estimated 2009 sales.
The analyst sees Radware so far being unsuccessful in trying to increase its revenue, and believes Radware’s main objective is to acquire Nortel’s North American installed base and distribution channel.
Kovler sees an opportunity for Radware "to rationalize costs, phasing out support for Nortel’s product lines, while improving sales coverage. The rationale is reminiscent of BlueCoat’s acquisition of Packeteer." He also sees potential sales synergies since both Radware and the Nortel division both target carrier customers, with Radware deriving about 30% of its revenue from carriers.
Yet the analyst is not confident of Radware being able to reach profitability. While the deal seems to value the Nortel division low enough to add to Radware's profit, he remains cautious "given limited financial detail provided and Radware’s track record execution", though he adds, "With a net cash position of $137.4mn and burning only $4 - $5mn / quarter from operations over the past few quarters, Radware does have some room to maneuver."
He warns that with about $2.30 of its $7.10 per share cash balance potentially earmarked for an acquisition, investors may also see less downside protection from Radware’s strong balance sheet.
Published by Globes [online], Israel business news - www.globes-online.com - on January 8, 2009
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