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Not all takeover targets are stocks you want to own. Consider, for instance, OpenWave (OPWV). The wireless infrastructure provider last week announced that it hired Merrill Lynch to consider strategic alternatives, including the possible sale of the company.

Mike Abramsky, an analyst with RBC Capital, wrote yesterday morning that a takeover is “almost certain,” and listed IBM (IBM) and EDS (EDS) as possible buyers.

The stock, however, has been sagging since last week’s announcement; it is a reflection of the other news OpenWave reported, in particular a massive reduction in the company’s third quarter outlook and the resignation of CEO David Peterschmidt. Some companies decided to sell in order to make a killing for investors.

This is a company that is desperately trying to find a rescuer. That is not a situation where speculating on a buyer is likely to be a significantly profitable exercise. Abramsky wrote yesterday that “a significant takeout premium is questionable,” and cut his price target to $9 from $10.

Why no premium? The answers are pretty obvious, but here’s Abramsky’s list:

  • Deteriorating core business.
  • Pressures to sell.
  • Uncertain new product upside.
  • Integration/rationalization costs.
  • He figures the likely takeout value is $8 or $9 a share, including cash. “Speculation on takeout has been muted, suggesting to us that few investors expect a white knight,” he wrote.

    Additional cost cuts and management changes may come to attract more attractive bids, but there may be no quick fixes. We thus see Openwave’s valuation remaining range-bound and volatile as takeout speculation continues, with its $100 million share buyback limiting valuation downside.

    Abramsky trimmed his EPS estimates to a loss of 31 cents a share pro forma in fiscal 2007, from a loss of 1 cents, and a loss of 19 cents a share in 2008, down from a profit of 19 cents.

    OpenWave yesterday was down 12 cents at $8.35; the stock was at $8.90 before the company put itself up for sale last week.

    OPWV 1-yr chart
    opwv chart

    Source: OpenWave: Shares Sag Despite "For Sale" Sign