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D.A. Davidson Says Cavium Got QLogic For A Fair Price

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June 17, 2016 3:55 pm
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D.A. Davidson analyst Mark Kelleher thinks Cavium Inc (NASDAQ: CAVM) acquired QLogic Corporation (NASDAQ: QLGC) for a fair price. On Thursday, the companies disclosed a deal whereby QLogic would be purchased for $15.50 a share comprising $11 a share in cash and 0.098 of a Cavium share worth about $4.50 a share. The brokerage reiterated Neutral rating on QLogic shares, citing the absence of additional bidders.

“Despite the seemingly modest take-out multiples, we believe the acquisition price is a fair premium given that QLGC’s core Fibre-Channel business (we estimate about two-thirds of total revenue) is in a terminal decline, and success in the Ethernet market is still nascent,” the analyst said.

The brokerage believes QLogic will have continued success in the 10-gigabit ethernet enterprise market for some time; however, Kelleher thinks Mellanox Technologies, Ltd. (NASDAQ: MLNX) will offer stiff competition in the 250-gigabit ethernet enterprise market.

Related Link: Barclays Says QLogic Buyout Will “Grow On People”

Cavium already sells ethernet switches and adapters, therefore, the company might be looking to boost its market share there.

The analyst pointed out that Broadcom Ltd (NASDAQ: AVGO), another QLogic rival, has acquired Emulex last year; therefore, Kelleher does not expect Broadcom to show any interest.

In conclusion, the brokerage thinks that the $15.50 acquisition price valued QLGCat about 14.2X its calendar 2017 EPS estimate of $1.09. Net of $4.20 per share in cash on the balance sheet, the multiple is approximately 10X its calendar 2017 EPS estimate. The analyst expects the deal to close. Therefore, the analyst adjusted his price target to the take-out price of $15.50.

At time of writing, QLogic was up 0.3 percent at $14.85.


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