F5 Networks and Ciena Buyout Rumors Are Signs of the Times
Editors' pick: Originally published July 15.
Vague tech M&A rumors circulating among traders often (though not always) don't pan out. And their accuracy rate might be even lower on an options expiration Friday. But even when they prove unfounded, the ability of such rumors to spread can shine a light on which companies and industries markets deem especially likely to be targeted for M&A.
The rumors that hit F5 Networks (FFIV) - Get Reportand Ciena (CIEN) - Get Reporton Friday definitely fit that description. F5, which was already reported in June to have hired Goldman in response to takeover interest, didn't move much on today's rumors. But Ciena rose 2.7%.
F5 looks like the kind of enterprise tech company that could be targeted by private-equity firms, given how many other enterprise names with similar growth and valuation profiles have been taken out.
The company remains the dominant player in the market for application delivery controllers (ADCs) that direct traffic to and offload various functions from web servers, and also has a growing security hardware/software business. However, corporate ADC sales have been hurt by cloud infrastructure adoption, as well as by the growing use of "virtual" ADCs that consist of software running on commodity hardware.
Still, with shares trading at a moderate 15x their consensus fiscal 2017 EPS estimate and a buyer potentially able to boost earnings via cost cuts, a P-E firm could come knocking. Cisco Systems (CSCO) - Get Report is also a potential suitor -- the company exited the ADC market several years ago in favor of a partnership with F5 rival Citrix Systems (CTXS) - Get Report, and has been using M&A to grow its security presence. HP Enterprise (HPE) - Get Report, which has signaled it's open to major acquisitions, is another possibility.
As for Ciena, the company's position as a major independent optical networking hardware provider in a market that's seeing both M&A activity and growing demand from cloud giants could spark takeover interest. Rival Alcatel-Lucent (ALALF) recently merged with Nokia (NOK) - Get Report, and smaller optical networking firms BTI Systems and Transmode have been acquired by, respectively, switch/router vendor Juniper Networks (JNPR) - Get Report and Ciena rival Infinera (INFN) - Get Report.
It's plausible that Ciena or Infinera could also be targeted. Ericsson (ERIC) - Get Report, which has been using acquisitions to lower its dependence on its slow-growing mobile infrastructure business, is a potential buyer ... even if the company recently formed a multifaceted alliance with Cisco, which competes with Ciena. Juniper is another possibility, if the company feels it needs a larger optical deal to become less dependent on switch and router markets for which trends such as software-defined networking (SDN) and network functions virtualization (NFV) pose long-term risks.
None of this guarantees anything, of course. It's quite possible that F5 and Ciena (and for that matter, Infinera) remain independent a year from now. But recent events do once more show how there's a method to the madness of tech M&A rumors.
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