NetApp: Be Skeptical of Buyout Talk

NetApp (NTAP) shares have extended yesterday’s rally, which apparently is due to ongoing speculation that the company could be an acquisition target.

Cowen’s Louis Miscioscia assessed the rumors in a research note this morning. He says an acquisition of the company is possible, but unlikely. “NetApp has a commanding presence in the NAS [network-attached storage] space, which would be attractrive to any enterprise hardware company,” he writes. “However, given timing and finances, we believe there is only one possibility as [a] candidate, IBM.” (IBM)

And even IBM would be a surprise, he says. Miscioscia notes that while IBM has done many deals over the past 10 years, none would be as large as this one - he figures it would take about $10 billion to buy NetApp, given a modest premium to the current $8.6 billion market cap. He says the odds IBM would attempt a deal that size are “low,” given its focus on buying smaller companies. But he does note that IBM currently resells NetApp’s line of NAS products, accounting for about 5%-6% of NTAP’s sales. And he notes that it would address IBM’s loss of market share in the segment to both EMC and NetApp. If IBM financed a $10 billion deal with debt financed at 6%, he calculates, NetApp’s free cash flow would cover the interest costs.

Miscioscia does not see other potential buyers as likely bidders. Hewlett-Packard (HPQ) would be a good fit, he says, but just completed its $13.9 billion acquisition of EDS, and concludes that even a company as deep as HP would find absorbing two $10 billion-plus acquisitions at once to be “very taxing.” He rates the odds of such a deal as “unlikely.”

He also considers a bid by Dell (DELL) “unlikely.” Given that Dell lacks a big sales force, “NetApp doesn’t fit as well” as it would in IBM or HP. He also notes that Dell itself is still in “major turnaround mode,” making a large acquisition less probably.

Sun Microsystems (JAVA) he says is “very unlikely” to target NetApp, he says. The combination would “make a lot of sense,” he says, but Sun seems unlikely to have the requisite resources given a weak currency in its stock and insufficient cash on hand. He also notes that it would be almost a merger of equals, with the two companies sporting comparable market caps.

He also says EMC (EMC) would be a “very unlikely” buyer, given the antitrust issues such a combination would likely raise, with EMC already the leader in the storage segment.

One other rumored potential buyer not addressed by Miscioscia: Cisco Systems (CSCO).

NTAP, which rose $1.47 yesterday, today is up another 22 cents, or 0.86%, to $25.78.