Fore's stock plunge.............................
post-gazette.com
Fore stock sinks 22%; acquisition is blamed
Thursday, August 27, 1998
By Michael Newman, Post-Gazette Staff Writer
By the merciless yet mysterious logic of the market, Fore Systems has just spent $250 million in order to lose $546 million.
Fore's market value dropped $546 million yesterday, to just under $2 billion, after investors drove shares down 22 percent in heavy trading. The sellers were apparently expressing their displeasure at Fore's $250 million acquisition, announced after the market closed Tuesday, of Berkeley Networks, a small California startup.
But Fore officials hailed the deal, saying it would allow the Warrendale-based company to offer a more complete line of networking equipment to small, medium and large customers.
The purchase, valued at $250 million based on Fore's Tuesday's closing share price of $24.25, will result in a charge of between $1.80 and $2.20 per share for the quarter that ends Sept. 30.
Fore will issue 8.475 million shares and grant 607,000 options in exchange for Berkeley's shares, and will pay Berkeley's shareholders up to $30 million if the California firm meets certain product and revenue goals.
The deal will reduce earnings by 4 cents to 6 cents over the next two quarters, according to Fore, as it spends more on marketing and sales. Shares closed yesterday at $18.88, down $5.38.
Moreover, some analysts speculated the deal may make Fore less attractive as a takeover target, which could displease investors. Fore is the seventh-largest firm in the network-equipment industry, which is undergoing a period of consolidation.
Fore's recent price - it reached a 52-week high of $28 July 23 - was based at least in part on investor sentiment that it would be bought by a larger company, said Matt Barzowskas, an analyst at First Albany Corp. in Boston. "Now that they've gone out and done this, it shows they see themselves as independent."
Still, most analysts saw the steep decline as an overreaction. "I think it's kind of an unwarranted selloff," said Martin Pyykkonen at CIBC Oppenheimer in New York. He called the acquisition "a good strategic move."
Berkeley Networks, which is based near Silicon Valley in Milpitas, makes networking equipment using a technology known as "gigabit Ethernet." Founded in 1996, the 70-employee firm has little if any revenues and few if any customers. As a privately held firm, it does not release such information.
"We don't have a lot of shipments out there, but we have demand," said Donal Byrne, vice president of marketing and product management for Berkeley. "We're basically in early shipment."
Ron McKenzie, Fore's vice president of strategic marketing, said the acquisition was made more for Berkeley's technology than for its customer base or revenues.
About two-thirds of Fore's revenues come from products using a technology known as asynchronous-transfer mode, or ATM. ATM enables large networks to be fast and versatile, attracting such customers as Microsoft and MCI, but often smaller firms find it unnecessary.
Berkeley's more-popular gigabit Ethernet technology is used in smaller corporate environments. Berkeley's equipment also works with Windows NT, Microsoft's operating system for corporate networks.
In addition, Berkeley's equipment works faster and more efficiently than its rivals', Fore's McKenzie said. "We got the best private company in this business," he said. "We can now integrate Berkeley's solutions into our network solutions."
Ironically, it is just such integration that may lessen Fore's value as a takeover candidate, Barzowskas said. When larger firms look at Fore, he said, "they're basically looking at it for its ATM capability, not its Ethernet capabilities." From Fore's point of view, however, "it makes sense for them, if they want to survive, to be able to offer a full suite of products."
So is it a case of short-term market thinking vs. long-term corporate strategy?
"I think folks may be reacting to the short-term dilution" of share value, McKenzie said at midmorning, with the stock down about $4. McKenzie and Byrne launched a full-court press yesterday, calling analysts and the media to stress the advantages of the deal.
"We expect this to be a break-even transaction for the end of the fiscal year," McKenzie said. "We think this positions us very strongly going forward."
Barzowskas and Pyykkonen are lukewarm on the stock. Barzowskas' rating is "neutral" and Pyykkonen's is "hold," though he said it was based more on the company's valuation than its fundamentals.
Meanwhile, Michael Duran of Lazard Freres reiterated his "buy" rating yesterday, even as Michael Karfopoulos of the Soundview Financial Group downgraded Fore to "short-term hold" from "short-term buy." Of the 17 analysts who follow the stock, according to Nelson's Research, 11 recommend buying it, while six recommend a hold.
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