gda,
1. If the valuation of the stock is determined by the P/E, what
will happen to it after the Symbios deal goes through:
A. It will double, because Symbios earnings are at least as high as
adaptec's
B. It will triple, because redundant costs will be cut which will
drive the combined company's earnings even higher.
Based on historical figures A or B could well be right. However, in
the short/medium term there are two major problems - ADPT's market
is likely experiencing pricing and margin pressures (?), the pain of
integrating Symbios will hit the bottom line.
In the longer term, they will likely have a stronger and more efficient
business, which could put earnings up anywhere around your suggestions.
ADPT have stated that they intend to fund the integration from cash
and borrowings, but there must surely be a risk that integration costs
and any market slow-down could affect their liquidity. If this is so,
then a logical choice might be to raise more cash through issuing
more stock. I *hope* ADPT are strong enough to avoid this approach,
but their track record suggests they don't like debt, so there could
be a chance that they will issue more shares.
Since you are in the business are you able to give a read about the
current health of the ADPT/Symbios market ?
2. If the valuation is determined by the PSR wouldn't it double
after the Symbios etc. since the combined company will have close to
have doubled adaptec's sales?
On the latest figures we have, ADPT sells around $1B, Symbios $700k,
so ADPT at $20.50 has a PSR of about 2.2 (Yahoo). Assuming that
"ADIOS" at least maintains the combined sales (?) the PSR would
fall to around 1.3. ADPT has quite consistently traded on PSRs >2.
However, historically ADPT has incremental earnings growth......
I agree with you about the long term wisdom of their strategic activities.
A company stands or falls by the strength of it's management. ADPT
have made success seem easy for many years. Of course it wasn't easy
at all; they made the right decisions at the right time, again and
again. The experience that goes with that hasn't left the company,
and what it is doing now looks sensible in the longer term. However,
it's got to get there first, and that will take time..........
Mark |
