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To read Jim Cramer's take on Siebel Systems, click here.
We have had our eye on
for some time as a potential takeover target in the struggling software space.
The Wall Street Journal's
"Heard on the Street" column highlighted the pros and cons of the Siebel story Thursday morning, and while we aren't taking any action on the story, we are going to add the stock to our watch list and look to take action on a pullback to $8.50 a share. The stock was recently trading at $9.35.
Inflection-point play Siebel hit our radar screen as a low-dollar way to gain access to strong growth in customer relationship management (CRM) software. We believe shares have as much as 25% upside over the next three to 12 months as investors speculate on a potential takeover bid.
Siebel is the leading CRM provider. Its technology allows Fortune 500 companies such as
to better manage customer data and automate customer support services. But the company faces stiff competition from the likes of
, which is growing its user base at a rapid clip, and Siebel's management has struggled to find a good use of its $2.25 billion cash hoard. It has said it will look to invest in the business as opposed to paying a large one-time dividend.
Tough competition, coupled with some earnings hiccups, has led to a 10% decline in Siebel shares over the past year. We believe there is more value to Siebel's business than investors are currently pricing into Siebel's stock, and that the upside from the potential for the company to go private or be taken over by acquisition-hungry
far outweighs downside in the business from current levels.
The recent action by corporate activist Carl Icahn, who took a 4.5-million-share position in Siebel on May 13, and who has a history of bringing out value in his investments, confirms our view. Icahn loves to get involved in companies that are wreckable, meaning he only puts his money behind companies that he believes are worth more dead than alive. We believe this practice holds true with Siebel.
If you look at the company on an enterprise-value-to-sales basis -- that is, after you add the debt and subtract the cash then divide that by sales -- the valuation becomes even more compelling. On this basis, Siebel is trading at a mere 1.78 times sales vs. a five-year average enterprise value to sales of 2.92 times, and 75% below that of its chief competitor salesfore.com. Not to say that salesforce.com doesn't deserve a premium multiple given its superior growth rate, but we believe the valuation disconnect has become too large, and a reversion-to-the-valuation-mean type of trade in Siebel may be in order.
We view the company as attractive as a takeover target of Oracle -- which has publicly said it is on the acquisition hunt now that the PeopleSoft integration is well under way -- or of another large software player looking to generate substantial cash flows.
Additionally, there are billions of dollars sitting in the venture capital and leveraged buyout shops right now. Siebel generates solid free cash flow of about $250 million to $400 million a year, and it has no long-term debt to speak of on its balance sheet. With $2.25 billion in cash on the books and Carl Icahn muscling into the picture now, we wouldn't be surprised to see some boardroom drama in the coming year that will lead to a higher stock price.
Don't get us wrong, we don't like Siebel's business model. Its technology is clearly not as innovative as salesforce.com's, and its growth in recent years wouldn't even register a 1.0 on the Richter scale. But we are attracted to the story because there is clear evidence that the company is on the block via Icahn's stake, and there are billions of dollars lying idly at private equity firms that we believe could be attracted to Siebel's solid cash flows and clean balance sheet.
We will alert you readers should we decide to take action and add Siebel to the model portfolio.
David Peltier is a research associate at TheStreet.com In keeping with TSC's editorial policy, he doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Peltier appreciates your feedback;
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William Gabrielski is a research associate at TheStreet.com and is accredited with a Series 7 license. In keeping with TSC's editorial policy, he doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Gabrielski welcomes your feedback;
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