RSA Security Acquisition Is Bullish For ActivIdentity
Posted on June 30, 2006
Last night EMC announced the acquisition of RSA Security (RSAS) for $28 per share in cash or about $2.1 billion. After stripping out RSA´s cash position, it appears that the price paid for RSA was approximately 5X 2006 revenue estimates. This acquisition of RSA Security is very positive for all the players in the identity assurance and authentication market, and is specifically bullish for my pick in the sector: ActivIdentity (ACTI).
From what I understand the acquisition of RSA Security by EMC was done via an auction of sorts. So one could expect that the other suitors for RSA Security, who did not win the bid, will now consider other companies operating in the identity assurance and authentication market. As such, the acquisition will surely heighten investor interest in the sector given the possibility of further mergers and acquisitions over the coming year.
As I noted in this post, ActivIdentity (ACTI), one of the smaller competitors in the industry, sells for an extremely low valuation, especially as compared to the price paid for RSA Security in the recent acquisition. Clearly as a smaller competitor in the midst of a turnaround, with a history of losses, and no comparable scale to RSA, ActivIdentity does not deserve the same type of premium multiple afforded to RSA. However, with nearly $140 million in cash and estimated yearly revenue of $45 million, the stock could easily be worth 2X Revenue + Cash or about $5 per share. However, I believe that a more reasonable valuation, assuming additional M&A activity in the industry, and some evidence in revenue growth at ACTI, would be about $6.50 per share or about 3X EV/Sales. The bottom line is that the increased investor interest in the sector, coupled with additional M&A activity and improving operating results at ACTI, significantly reduces the risk and downside for ACTI´s stock, especially considering the company´s huge cash hoard. At the same time, potential upside of 12% to 40% in ACTI´s stock seems likely over the next year. With a little to no downside and above-average market upside, ACTI remains an excellent investment "gamble".
Please Note: I first recommended ActivIdentity (ACTI) at $4.37, and still hold a position in the
stock. All ideas, opinions, and/or forecasts, expressed or implied
herein, are for informational purposes only and should not be construed
as a recommendation to invest, trade, and/or speculate in the markets.
Any investments, trades, and/or speculations made in light of the
ideas, opinions, and/or forecasts, expressed or implied herein, are
committed at your own risk, financial or otherwise.
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