By Alex Gavrish, Etalon Investment Research; author of “Wall Street Back To Basics

Riverbed Technology

Elliott Management stake

In November of 2013, an activist hedge fund Elliott Management disclosed a 10.4% stake in Riverbed Technology, Inc. (NASDAQ:RVBD), a leader in application performance infrastructure solutions. Riverbed stock price closed sharply higher after disclosure, rising 16%, and closed at $17.5 per share. Based on the latest stock price before the disclosure by a position by activist investor, shares of Riverbed declined by about 37% since October 2012, when Riverbed acquired OPNET Technologies LLC (NASDAQ:OPNT). According to the latest holding disclosure filed on March 11th, 2014, Elliott Management beneficially owned 14.7 million shares and, combined with derivative agreements, had a total net economic exposure and voting power for 10.5% of Riverbed Technology total shares outstanding.

Buyout offer for Riverbed

On January 8th, 2014, Elliott Management disclosed that is sent a letter to company’s board of directors expressing its proposal to acquire Riverbed Technology, Inc. (NASDAQ:RVBD) at $19 per share. The draft merger agreement supplied by Elliott included a “go-shop” provision, which would permit the company to solicit competing acquisition proposals for a period of 45 days following the signing date of the definitive merger agreement. On January 15th, 2014, Riverbed issued a press release in which it announced that its board of directors determined that the offer significantly undervalues the company and is not in the best interest of it’s shareholders. Subsequently, in February 2014, Elliott raised its offer price to $21 per share and later published a presentation prepared by it’s M&A advisor, Moelis & Co (NYSE:MC), according to which the offer is fair and attractive to company’s shareholders. The revised offer was promptly rejected by Riverbed on February 28th, 2014 as inadequate. On March 4th, 2014, company’s board of directors approved a $250 million increase to share repurchase program, bringing the total authorized amount available for share repurchases to $375 million.

Elliott Management’s offer and renewed pressure on board

Shares of Riverbed Technology, Inc. (NASDAQ:RVBD) declined by about 10% over the last two days, after company lowered its revenue guidance. Elliott Management immediately used this opportunity to increase pressure on Riverbed’s management and board, reaffirmed their buyout offer at $21 per share and demanded that Riverbed’s board immediately start exploring strategic alternatives and possible sale of company. Based on a recent share price, Riverbed Technology had market capitalization of $2.95 billion and enterprise value of $3 billion. Using an annualized Q1 2014 Adjusted EBITDA, company is currently valued at an EV/EBITDA multiple of x10. Riverbed can attract interest of private equity funds and other possible bidders. According to Bloomberg‘s March 1st, 2014 article, Riverbed received informal expressions of interest to acquire the company for as much as $25 per share. Recent share price decline and operational and business weaknesses can be utilized to initiate a position. At the same time, investors receive an additional downside protection due to activist hedge fund’s involvement and an “open” buyout offer.

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