Since the beginning of 2005, PowerDsine (Nasdaq: PDSN) has been under considerable of pressure. Its share opened the year at $14, but began falling when the vesting period came to an end.
PowerDsine president Ilan Attias and CEO Yigal Rotem have sold shares for an aggregate $10 million. The fall in the share continued when Jerusalem Venture Partners sold $2.2 million worth of shares and ABS Ventures sold $850,000 worth in mid-February. Between the beginning of the year and mid-March, PowerDsine's share price had fallen 36% to $9. In the past two weeks, it has climbed back to $10.50, giving a market cap of $185 million.
The plunge in PowerDsine's share has turned the Hod Hasharon-based Power over Ethernet (PoE) leader into a very good acquisition target. PowerDsine raised $79.35 million in June 2004, including $20.7 million in an offer for sale, at a company value of $217 million ($250 million fully diluted). Thanks to the issue, the company had $43.7 million in cash and cash equivalents at the end of 2004. After deducting this amount, the company has an actual value of $141.7 million.
What are the chances that PowerDsine, which went public only a few months ago, will be swallowed by a giant semiconductor or telecommunications equipment company? I think there's a very good chance. Sources inform “Globes” that shortly before PowerDsine's IPO, Freescale Semiconductor (NYSE:FSL) (then Motorola Semiconductor) was in advanced negotiations to acquire the company at an estimated company value of $200-250 million.
Those negotiations broke down when PowerDsine's shareholders concluded that they could hold a successful IPO, and that the company's value would rise over the subsequent year. So far as is known, Freescale was not the only company to talk to PowerDsine, and other semiconductor companies have reportedly been sniffing around in the past couple of years.
PowerDsine posted a loss of $1.1 million ($0.10 per share) on $41.6 million revenue for 2004. The company expenses options distributed to employees; excluding this item, it posted a profit of $1.5 million for 2004.
PowerDsine is considered a pioneer of PoE and its main inventor. The processors it has developed enable power transmission over cable and data networks, in order to operate various consumer products. The simplest way of imagining what the company does is to think of the ordinary fixed-line telephone connected to a wall jack, which gets both power and communications through the same cable. By contrast, a PC has two lines: one to the Internet and the other for electrical power. PowerDsine's processors and switches enable certain appliances to receive power over the local area network (LAN), thereby eliminating one cord. At this stage, PoE can only power appliances that use little power, such as IP telephones, WLAN access points, and network cameras, but the technology will later deliver sufficient power for high-energy consumers, such as PCs.
Size does matter
IDC estimated the PoE market at $88 million in 2004, and predicted that it would grow to $294 million by 2008, following standardization under the af.802 standard in June 2003.
The two PoE leaders are PowerDsine and Linear Technology Corp. (Nasdaq:LLTC), which has a market cap of $11.9 billion. Linear Technology's revenue is reportedly about the same, or possibly slightly greater than, PowerDsine's. Further down the PoE ladder are two semiconductor giants that entered the market fairly late, and have not yet been able to generate very large revenue: Maxim Integrated Products (Nasdaq:MXIM), which has a market cap of $13.5 billion; and Texas Instruments (NYSE:TXN). Like Linear Technology, Maxim and Texas Instruments do not disclose their revenue from PoE products, but it is believed to amount to a few million dollars.
One of PowerDsine's drawbacks is, of course, its small size. Although considered a PoE pioneer and the company developed the vision and innovative technologies, its smallness affects its profit margin and its ability to set up a large sales department. In contrast, its competitors are giants with huge turnovers: Linear Technology has $800 million in sales, and Maxim $1.4 billion. They have large profit margins and can strongly leverage profits from PoE technology.
PowerDsine's emergence into profitability in recent quarters has also helped turn it into an acquisition target. When a company has a net profit and positive cash flow, it becomes more attractive to a buyer. In addition, economies of scale can enable a buyer to increase both its revenue and gross profit margin.
A semiconductor company is the most likely buyer of PowerDsine, because semiconductor companies can better fulfill PowerDsine's business potential than a communications equipment maker. Semiconductor companies that already sell processors to communications equipment producers can use the acquisition of PowerDsine to expand their products portfolio, and aggressively penetrate the PoE market. This category of potential buyers includes Broadcom (Nasdaq:BRCM), Infineon Technologies (NYSE, FSE: IFX), Marvell Technology Group (Nasdaq: MRVL), National Semiconductor (NYSE:NSM), STMicroelectronics (NYSE:STM), Texas Instruments, and, of course, Freescale.
For Freescale, acquiring PowerDsine could be especially worthwhile since it sells processors to PowerDsine. An acquisition would give Freescale a business with a particularly high profit margin.
The second category of potential buyers consists of PowerDsine's competitors: Linear Technology, Maxim, and Texas Instruments. Traditionally, Linear Technology and Maxim do not like making acquisitions and posting non-organic growth, so there is fairly little chance that they will buy PowerDsine. Linear Technology is currently enjoying a tail wind that PowerDsine can only dream about - collaboration with Cisco Systems (Nasdaq:CSCO). The two companies have been collaborating for several years, with the result that Cisco launched products based on Linear Technology's technology a few months ago. If Linear Technology decided to sign a check for PowerDsine, it would dominate the PoE market overnight.
What about the two small PoE competitors? Maxim and Texas Instruments entered the market too late, and despite heavy investments in development, they appear to be a long way from reaping any fruits. If either of the companies decides to acquire PowerDsine, it would overnight switch from a secondary player in the market to a primary player, and benefit from PowerDsine's technological edge.
Cisco? Yes or no?
In the third category are giants Cisco and Juniper Networks (Nasdaq:JNPR), the global leaders in the switches market, with the ability to easily integrate PowerDsine's products. At this time, the likelihood that Cisco will sign a fat check for PowerDsine is low, because Cisco does not normally enter markets, such as PoE, which are smaller than $1 billion, and because it is already selling products based on Linear Technology's technology.
Nevertheless, in the slightly more distant future, Cisco might change its mind about a possible acquisition of PowerDsine. This will depend on two factors: the success and growth of the PoE market, and collaboration between the two. If these two factors occur, then PowerDsine will be the most natural candidate for Cisco to buy, since, unlike its competitors, to the best of my knowledge, PowerDsine is the only pure player in PoE.
Something else related to Cisco that could turn PowerDsine into an attractive acquisition target is Cisco's most recent acquisition of WLAN equipment vendor Airspace for $450 million. In its latest recommendation in early March, Piper Jaffray reiterated its "Outperform" recommendation for PowerDsine at a target price of $16 per share. Piper Jaffray said that Airspace was one of PowerDsine's customers (reportedly buying products to the tune of hundreds of thousands of dollars a year), which means that Cisco's acquisition of Airspace could open the door to future collaboration with Cisco for PowerDsine.
The fourth category of potential buyers are PowerDsine's customers among telecommunications equipment manufacturers. These include 3Com Corporation (Nasdaq:COMS), Nortel Networks (NYSE; TSX:NT), Avaya (NYSE:AV), Extreme Networks (Nasdaq:EXTR), and others. Nevertheless, the chance that any of these companies would acquire PowerDsine are quite slim, since they have negligible ability to leverage PowerDsine's present business to a higher level. Avaya, 3Com, Nortel, and Symbol Technologies, which compete against each other, account for over half of PowerDsine's revenue, and if any one of them acquires PowerDsine, it would have to give up a large part of PowerDsine's customers, and absorb a major drop in its revenue.
IDC has also recently said that PowerDsine might be acquired. In research released a few months ago, IDC pointed out PowerDsine's technological advantages over its competitors, and its corresponding economic disadvantages in production. IDC therefore believes that PowerDsine is likely to be bought by a semiconductor player, with Freescale the leading candidate, and ST Microelectronics and National Semiconductor also in the running. Acquisition by a competitor company is considered less likely, but IDC says this estimate could change.
Published by Globes [online], Israel business news - www.globes.co.il - on April 5, 2005