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Riverbed Technology (RVBD) announced on Monday that it will acquire OPNET technologies (OPNT). Riverbed will pay $43 per share for the company, in a deal net valuing the firm at $921 million. The offer represents a 34.0% premium compared to Friday's closing price of $32.10 per share.

The Deal

Riverbed Technology announced that it will acquire OPNET Technologies, a leading provider of solutions for application and network performance management. Riverbed will pay $43 per share in cash and shares, valuing the firm at $1 billion. Shareholders in OPNET will receive $36.55 in cash and 0.2774 shares in Riverbed for every share they currently own. Shares of OPNET reached all time highs of $48 last year.

Combined, Riverbed and OPNET extend the network performance management business in the application performance management market. Cascade and OPNET will combined report annualized revenues exceeding $250 million.

CEO and Chairman Jerry Kennelly commented on the deal,"The addition of OPNET establishes Riverbed as the clear leader in the high-growth and converging application and network performance management markets. This acquisition also transforms Riverbed into a billion dollar revenue company."

For its annual year of 2011, OPNET generated $172.7 million in revenues. The company net earned $18.3 million for the year. The deal values OPNET's operating assets at $921 million. This values the company at 5.3 times annual revenues and 50 times annual earnings.

OPNET will be integrated in Riverbed's Cascade business unit. The company expects that the deal will be accretive to full year 2013 earnings, on a non-GAAP basis. Meaningful revenue and operating synergies are expected by 2014.

The deal is subject to customary closing conditions, including shareholder approval from OPNET's shareholders, and regulatory clearance. The deal is expected to close before the end of the year.

Valuation

Riverbed Technology ended its third quarter of 2012 with $533 million in cash, equivalents and short term investments. The company operates without debt, for a comfortable net cash position of roughly half a billion.

For the first nine months of 2012, Riverbed generated revenues of $599.5 million. The company reported a net income of $49.8 million, or $0.30 per diluted share. Full year revenues are likely to come in around $825 million. Net income could come in around $70 million.

The market currently values the firm at $3.5 billion. Excluding the net cash position of roughly $500 million, this values the operating assets at roughly $3 billion. This values operating assets at 3.6 times annual revenues and 43-42 times annual earnings, excluding the impact of OPNET.

The company currently does not pay a dividend.

Investment Thesis

Year to date, shares of Riverbed Technology have fallen some 4%. Shares rose from $23 in January to highs of $30 during spring. A poor second quarter guidance resulted in a correction in April, and shares hit lows of $13 in July. Shares recovered to levels around $23 at the moment.

Over the past five years, shares have risen some 35%. Shares traded as low as $4 at the end of 2008 and steadily rose to highs of $44 in the beginning of 2011. Shares have roughly lost half of their value from that point in time. Revenues rose from $333 million in 2008, to an estimated $825 million in 2012. Net income rose from $10.6 million to an estimated $70 million this year.

As a result of the acquisition, Riverbed will issue some 6.4 million new shares, boosting the numbers of shares outstanding by almost 5%. The company will borrow some $500 million from Goldman Sachs and Morgan Stanley to finance the deal, and pay the remainder with cash at hand.

Pro-forma, the combination generates revenues exceeding $1 billion in 2012. Net earnings could come in around $90 million, which could grow in 2013 and 2014 on the back of cost and revenues synergies. The deal seems very reasonable, but it remains to be seen how shareholders react on the announcement when equity markets re-open.

Riverbed Technology furthermore added that results for the fourth quarter are expected to be strong. I would not be surprised if shareholders react negatively to the deal given the significant premium and the size of the deal. I remain fairly optimistic about the long term prospects for Riverbed.

Source: Riverbed Technology - Cloud Keeps Booming As Company Announces Acquisition Of OPNET