Fresh off activist wins at Hess and BMC Software, billionaire hedge fund activist Paul Singer is now taking aim at NetApp . Paul Singer's Elliot Management recently reported a stake of just under 5% in its latest 13F filing with the SEC. Reports indicate that Singer has been having discussions with the company for several weeks about strategic options, including new directors and returning cash to shareholders (see Singer's latest moves).
Don't take Paul Singer lightly
Paul Singer is certainly an investor a company doesn't want to be a target of. He has also famously gone after Argentina over debt payments. Singer has taken Argentina to U.S. Federal Court demanding full repayment on bonds his firm owns. He won a court order seizing a ship belonging to Argentina last year, and the President of Argentina will only rent a plane for international travel as she is afraid that her own plane could be seized by Singer overseas.
Singer launched an aggressive campaign to shake up Hess. He was even able to get the company's namesake John Hess to split the Chairman and CEO titles. With three of his nominees winning board seats, Singer will move towards his strategy of splitting up the company to increase shareholder value. Singer has indicated that if the company were separated into 3 companies – international operations, domestic shale assets, and refining, that the company could be worth as much as $126 a share.
For Singer, this isn't his first foray into looking for change at a technology company. He was successful in his campaign at BMC Software to get the company sold. BMC Software struck an agreement this year to be taken private for $46.25 a share in cash in a deal led by Bain Capital. It seems that when Paul Singer speaks, companies listen.
NetApp is an undervalued situation
NetApp is a data-storage company. Shares surged 6.2% after the news was announced of Elliot's stake in the company. Over the past two years, the stock is down 33%. Where the value lies in NetApp is that it's a cash-rich company--at the end of April the company had more than $7 billion in cash, or half the company's current market cap of $13.86 billion. NetApp needs to do something to return cash to shareholders in the form of dividends or buybacks. Currently, the company is doing neither.
NetApp would be an attractive acquisition target for either of these companies
The other option that Elliot has is to push for a sale of the company like it did with BMC Software. NetApp has been in business since 1992. At the height of the dot-com boom, the company was valued at almost $47 billion in 2000. The company has a solid business and could fit into the product mix of Oracle or Cisco Systems .
NetApp currently provides data storage solutions for Oracle. NetApp storage is able to scale Oracle's databases. In other words, NetApp provides Oracle customers an easier solution as they expand their databases. Considering that Oracle has a current market cap of over $161 billion and over $33 billion in cash, an acquisition of NetApp would be a drop in the bucket and allow Oracle to integrate NetApp into its line of Oracle products (see which hedge funds are loving Oracle).
Cisco and NetApp have been working together since 2003. An acquisition by Cisco would provide Cisco a data storage solution to its networking business. NetApp is currently a Cisco Original Storage Manufacturer with rights to distribute Cisco data center switches. NetApp and Cisco combined would offer a single platform for companies to transition to cloud computing.
As trends in technology continue to shift towards cloud computing, this combination would provide added growth for Cisco. An acquisition by Cisco would be easy as well since Cisco has a current market cap of over $127 billion and over $46 billion in cash. At the end of 2012, Cisco saw Edinburgh Partners as its highest conviction hedge fund owner, where the fund had 13% of its 13F portfolio invested in Cisco (see all of Edinburgh's stock picks).
NetApp is indeed an undervalued situation and a possible acquisition target. Paul Singer won't back down until NetApp pays out more cash to shareholders or puts itself up for sale. Either way, it's a win-win for shareholders. I recommend investors follow Singer into NetApp and buy the stock. He has proven that he can get the results needed for shareholders.
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