Radware's Well Deserved Share Price; Can Ceragon Mimic Radware's Success?

The most recent run-up came afterwards "Globes" reported that there for the moment two US research giants - to all appearances IBM and HP - who had approached the company and offered to buy it at around $50 per share.

Target price of $46

Last week Kidron raised his recommendation back up to "Buy" with a target price of $46, which is very close to the price set in the acquisition rumors. Nevertheless Kidron claims that Radware is worth a valuation of over $900 million based on the momentum in its business for the coming year, irrespective of the rumored purchase.

Kidron bases his optimistic outlook on an upcoming refresh of the Alteon platform, which Radware acquired for a tiny sum in early 2009. Kidron believes that over the at once year Radware -- through giant OEM clients -- will be able to penetrate, with significant sales, the hot sectors of virtualization and cloud computing.

In addition, he feels sales to large communications suppliers will be boosted, and all this momentum will bring Radware to a high 20% operating profit margin in the last quarter of the year.

Radware currently has around $180 million in cash, and more importantly -- high deferred revenue of more than $47 million, which accords relatively high visibility for the future. To my mind, that item hints that we won't before long return to the craziness of repeated quarterly profit warnings, as there were in the years earlier the Alteon acquisition.

The acquisition rumors

About the acquisition rumors, it's told on the capital markets that there were as a matter of fact two offers on the board of directors' table five months ago, and the Zisapel family, primarily chairman Yehuda Zisapel and his son CEO Roy Zisapel, decided to wait for higher offers. This was based on their belief that the business will improve considerably. Last week they received some support for their bold decision from investment bank Oppenheimer, which placed the share on Friday solidly above $40, in spite of the fact that the acquisition rumors receded. That implies that any new offer will be so then above the original one.

I believe that Radware's great turning point was the acquisition of Alteon from Nortel at the beginning of 2009, which in the end also strengthened the management team around CEO Roy Zisapel. The share price at that time was below $6, afterwards investors abandoned it following many profit warnings. The 2008 crisis which affected the entire telecommunications equipment industry as well did its part. Today, with the share about seven times higher, I wonder if what happened at Radware afterwards the Alteon acquisition pushed the Zisapel family to decide on another bold purchase at sister company Ceragon Networks Ltd..

Ceragon said about a month ago that it bought Norwegian company Nera for $48.5 million. Nera complements nicely Ceragon's products and geographic diversification in the microwave solutions sector for cellular networks, which are exploding with the traffic of heavy video, and need more and more investment in broadband.

The big risk in the acquisition is before all else the fact that Nera lost $14.5 million on $177 million revenue in the first three quarters of 2010. Just in case, this is a Norwegian company in other words distant both geographically and in mentality, with 800 workers, including an assembly plant in Slovakia.

Published by Globes [online], Israel business news - www.globes-online.com - on February 15, 2011 Reprinted on Seeking Alpha with permission © Copyright of Globes Publisher Itonut Ltd. 2011