Monday November 29 9:13 PM ET
Newbridge sale would be tough on Matthews
JAMES BAGNALL, Ottawa Citizen
KANATA, Ont. (CP) - A little more than two years ago, Terence Matthews, chairman of Newbridge Networks Corp (NYSE:NN - news)., was leaving a hotel in downtown Ottawa after one of his company's most successful annual meetings.
Newbridge had that day unveiled landmark contracts with British telecom behemoth BT PLC and was streaking toward $10 billion US in market value. It was enough to induce a little hubris. In a presentation to shareholders, Matthews had favourably compared Newbridge's affiliate investment program with the expensive corporate acquisition campaign then under way at arch-rival Cisco Systems Inc (NasdaqNM:CSCO - news). of San Jose, Calif.
"Is it time for Newbridge to acquire Cisco?" a bystander asked jokingly.
"I only buy good companies," Matthews shot back, obviously amused by the idea.
Now it's Newbridge that may be sold. Two weeks ago, Matthews told the world he was ready to at least consider a sale and he hired a New York investment bank to assess prospective buyers.
Now, as investors try to predict his next move, two questions remain.
Is Matthews ready to sell at the price that many analysts believe outside firms are willing to pay - that is, in the neighbourhood of $34 to $41 US a share? And, if he proves willing to settle on price, will Matthews throw a curve at potential buyers by insisting on a key role in the firm after a takeover?
The answers will go a long way toward determining whether a deal will happen.
It helps to understand some of the circumstances that led to Matthews's recent conversion. On one front, members of Newbridge's board of directors have been instrumental in getting him to consider the consequences of his industry's rapid consolidation.
Newbridge, they have told him, can only support a limited range of products on its own. Joining a giant, they've said, will allow Newbridge to stay at the forefront of networking technology.
On a separate front, Newbridge salespeople in the U.S. have been reporting greater difficulty competing against giant suppliers that offer all or most of the gear that goes into creating next-generation data networks.
Newbridge, which specializes in a switching technology known as asynchronous transfer mode (ATM), provides only one piece of a puzzle that also includes Internet protocol and fibre-optic technology.
All of this, combined with weaker-than-expected second-quarter results, pushed Matthews into action. However, it's one thing to accept the idea of a sale; it's quite another to let go - especially at the price analysts think he's likely to get.
Rob MacLellan, communications technology analyst with CT Securities Inc., calculates that a fair price for Newbridge would be $32.72 US, representing a market value of nearly $6 billion US.
This is a premium over Newbridge's recent price of around $25 US on the New York Stock Exchange, but well below the firm's 1997 peak of $67.69 US.
MacLellan justifies his conclusion by examining Newbridge's projected earnings next year for major product lines.
Because Newbridge has missed its earnings forecasts so many times in the past three years, many analysts are cautious about using any valuation calculation that includes them.
Instead, they look at what's known as a market cap/revenue ratio. This compares the price paid for other firms in the networking industry with the annual revenues of the acquired firm.
Analysts then assign a premium or discount based on the circumstances surrounding each sale.
The Ottawa Citizen examined eight such transactions in which the market cap/revenue ratio range from three to nearly 14. Taking the average ratio - eight - and multiplying it by Newbridge's projected annual sales ($1.4 billion US) results in an implied market value of $11.2 billion US. This, in turn, translates into a per share value of more than $60 US.
Is Newbridge likely to receive this price? No.
"Valuation exercises are tricky because there are so many variables," says Scotia Capital analyst Michael Urlocker. "In this case, the quality of the company's operations and its track record are very important factors." ¸ The Canadian Press, 1999 |
