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Cavium Inc (NASDAQ: CAVM) announced the acquisition of storage and connectivity hardware supplier, QLogic Corporation (NASDAQ: QLGC) to expand the TAM and breadth of its data center portfolio.
Canaccord Genuity’s Matthew D. Ramsay downgraded the rating on the company from Buy to Hold, while lowering the price target from $61 to $48.
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Shift In Strategy
While the acquisition could prove technologically beneficial in the long term, Ramsay believes “the deal brings with it a stark shift in anticipated strategy given Cavium is just ahead of several new product ramps and potentially lowers the long-term growth rate of the company creating a disconnect with Cavium's premium valuation.”
Expressing confidence in Cavium’s differential product portfolio, Ramsay mentioned it would now be complemented by a robust storage and Ethernet portfolio.
However, the analyst expressed concern that investors might react negatively to the sudden shift in the company’s strategy, as well as expectations of a more compressed valuation until the merger synergies are closer to being realized.
Financial Impact
According to the Canaccord Genuity report, “Cavium will purchase all outstanding shares of QLogic at an equivalent value of $15.50/share, consisting of $11 in cash and 0.098 shares of Cavium stock or ~$4.50 in value. The value of the transaction is $1.36B, financed by $220M in cash, $750M in debt and $400M in new Cavium equity.”
With the realization of the expected cost synergies of $45 million, management expects the deal to be accretive for the non-GAAP EPS in 2017 by $0.06-$0.07, while contributing over $400 million in revenues, following the discontinuation of the non-growth product lines.
Crypto Whales Are Loading Up — Are You?
New research shows the biggest crypto buyers are back. And this time? They could hold for the possibility that Bitcoin will surpass $100,000 in 2024. You don’t want to miss the next massive crypto bull run like we saw in 2020 and 2021. To know exactly what’s going on and what to buy… Get Access To Benzinga’s Best Crypto Research and Investments For Only $1.