Getgo: It seems that you have become a little selective in highlighting the comments in the Barrons article that might affect LSI. My take on the Barrons article was that the glass was three quarters full as it pertained to LSI's ownership of Symbios, and one quarter empty. You have ignored the three quarters full.
The general subject of the article was that Adaptec has become one of the beaten down tech companies that are "honest-to-goodness bargains".
The analyst most quoted, John Rossi of Robertson Stephens, seemed to think that Adaptec was poised for a rebound. Many of his reasons apply to Symbios just as well, if not more so. For example, he expected Adaptec to benefit "from a pickup in server demand with the coming debut of Microsoft's Windows NT 5.0 operating system." It has been clearly established on this board that the primary difference between Symbios and Adaptec is Symbios's strength in the server market as opposed to the PC, which is where Adaptec's strength lies. Thus LSI will benefit even more with the introduction of NT 5.0. As I recall, LSI said at the CC that they expected 30 times the growth in this area of the market over the next 2 years. (I will check with IR as to just what this 30X figure means.)
Rossi also noted that this coming quarter could be Adaptec's poorest quarter yet, because it has already announced that it is going to reduce inventory in the pipeline. He also noted the slide in PC prices , which hurt inclusion of "relatively pricey SCSI adapters". Clearly, lower PC prices do not affect Symbios. Currently we have no knowledge of an inventory imbalance affecting Symbios.
There were two financial reasons given for Adaptec's undervaluation. First Adaptec is paring its R&D budget of $100 million a year, which should result in its development projects being cut from about twelve to four. Less R&D means less of a threat to Symbios's dominance at the high end. Adaptec also has about $6 a share in cash with a book value of $7.60. Although I don't know how much, if any cash Symbios has, I would be shocked if it had any significant amount. However, it will be interesting to find out what the book value per share for Symbios is when it is revealed at the CC. On the other hand, with a price eleven bucks a share and six bucks in cash on hand, Adaptec is an outstanding takeover candidate.
Most significantly, Rossi expected Adaptec to earn "at least 70 cents in calender 1999." Here the comparison I will make can be far flung at best, but I will at least give it some rationale. Adaptec has twice as much sales as Symbios and aboubt 80% the number of LSI's shares. Thus, it would fair to assign an estimate of at least $.35 a share to Symbios, since it plays in the higher margin area of SGSI as well as has one third of its business in high end storage. Thus, even if one takes some of the lower analysts estimates for LSI of $1.35 and adds $.35, this raises next years earnings to $1.70 at the low end. And Barrons is suggesting that Adaptec is a bargain at 12 bucks with possible earnings of $.70? Seems to me that this makes LSI with Symbios an even better bargain. And remember that Adaptec is selling at 1.6 times sales, whereas Symbios was purchased at 1.2 times sales.
Now back to the takeover candidates of Adaptec. Two different analysts mentioned four potential suitors. As you wrote, these included Intel and National Semi. Advanced Micro Devices and 3COM were also included. The last three hardly strike fear in my heart. I doubt if 3Com will be doing any major takeovers in the near future given its US Robotics fiasco. National Semi and AMD have set their cross hairs on the low end of the PC market, and such a takeover makes some sense because this is where Adaptec's strength lies. Thus, a purchase of Adaptec by either of these companies would be welcome to LSI, since it would signal Adaptec's capitulation in the high end server market which is already Symbios's mainstay. So much for the first three.
Now for mighty INTC. Here the scenarios are varied. I will toss out just a few. As just noted on this thread, Symbios technology is being used on Intel's newest server motherboard run by Xenon chips. Thus, if INTC is interested in purchasing a complementary technology, it might be more interested in purchasing Symbios rather than Adaptec. If INTC has a problem with the government, it's in the PC area, not the high end server area, and any purchase of Adaptec would receive far more flak from the "gov" than any purchase of server technology. Thus, it would seem that any argument that would apply to Intel's purchasing SCSI capability would have greater application to Symbios than Adaptec. And this adds yet another dimension to LSI's dirt cheap purchase of Symbios. Within the next two years, the Symbios purchase has the potential to at least double in value if not more so. This means that LSI would have the option of selling Symbios at a profit of nearly one billion dollars. Clearly the ways in which this would enhance LSI's value are compelling. The possibilities range from financing a next generation fab, to intensive R&D, or sitting on over a billion in cash to buy back stock.
The Barron's article a cause for concern? More like a reason for optimism. |
