Truth Serum: Cabletron Rumors Aren't Adding Up
By Dan Colarusso
Associate Editor
9/1/99 8:51 PM ET
Sometimes, going back to the old girlfriend seems like it's worth the chase. And then there are days when you just know it ain't gonna work. Either way, when it goes on too long, it just gets boring for everyone. Takeovers are the same.
Exhibit A: Cabletron (CS:NYSE).
Will it get taken over? Probably. Someday.
Will the average investor be able to make money on it? Probably not.
The problem is that there's been too much talk, too much chatter and too much water under the bridge to get enough satisfaction from the deal.
Money manager Ashok Ahuja, of Icor Capital, has been hearing the rumors for too long. He says he got out of the stock (even his short positions) long ago even though he believes that 10% to 20% of today's smaller technology stocks will be taken over within the next two years.
"I don't think it [Cabletron] is worth playing," he says, pointing to the company's extended turn in the rumor mill. "Once the rumor starts, 70% to 80% of the premium may already be in the price. I'd be worried about it falling back on the news."
The stock, which closed Wednesday at 17 1/4, up 7/16, was up 35% in August.
Despite the fact that Ahuja's opinion makes a ton of sense in light of recent "take-unders" where target firms were snapped up for less than their current share prices, the masses continue to chase Cabletron's romantic aspirations. And yeah, we read Cramer asking for some guidance, but we have been watching this one for a while, trying to figure it out.
A Cabletron spokeswoman didn't return calls for comment.
On Tuesday, at 9:40 a.m. EDT, the JagNotes rumors page put up word of a possible Cabletron-Northern Telecom (NT:NYSE) deal with a price tag of 25 to 30 a share.
By a little after noon, StockRumors.com followed that with a note that the same mill was spitting out that Britain's General Electric was chasing Cabletron and also was willing to pay somewhere in the mid-20s.
That's funny. I never realized there was an echo on the Internet.
It was more than on the Net, though. Options traders went whole hog for the out-of-the-money calls that typically explode (in a good way) when a company gets taken out. As early as July, the Cabletron options were hinting that some investors were playing for a takeover.
So that leaves people like Ahuja thinking that such a move leaves the stock without much room to run in an acquisition. "If I couldn't quickly identify a strategic partner and a valuation, I'd stay away from it," he says. "I'd be surprised if it went for more than 18. A 10% to 20% premium would not be worth the risk."
After a month-long run-up, it might be wise to approach Cabletron the same way.
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