When Reports Use Price Drops For M&A Hope... Churning the Rumor Mill (NFLX, AKAM, VZ, IBM, LVLT)

A drop in price often brings up the “takeover chatter” from blogs, analysts, and news reports.  We have seen this discussed recently in Netflix, Inc. (NASDAQ: NFLX) where analysts and pundits talk about the severe drop in price neglecting the real value of the assets and the customer base for any would-be acquirer down the road.  Now this is moving to Akamai Technologies Inc. (NASDAQ: AKAM).

A report from Bloomberg has noted that Akamai Technologies Inc. (NASDAQ: AKAM) has dropped some 57% from highs and that this could allow Verizon Communications Inc. (NYSE: VZ) and International Business Machines Corporation (NYSE: IBM) to compete for a buyout of the video and content rapid delivery provider.

We would note that this report is on the heels of Level 3 Communications Inc. (NASDAQ: LVLT) completing the acquisition of Global Crossing.  Level 3 is also now looking at layoffs in the U.S., like that is a surprise after redundancies among Level 3 and Global Crossing workers.

What is so interesting about the new value after a 57% drop is that it doesn’t matter regardless of what Bloomberg is trying to tell you.  Akamai shareholders won’t take an at-the-money buyout and they sure won’t be able to say that the $3.8 billion market value is a “fair value” in buyout terms.  They will want a substantial premium and if Akamai does truly go in-play then management is going to tell any buyer “Our stock was worth over 100% more over the last year compared to today, so don’t give us any low-ball offers.”  Trading at 7.6-times EBITDA is one thing, but when you double that it is suddenly not so cheap.

Oddly enough, Bloomberg even noted that Akamai’s co-founder said he does not see the need to be acquired and the company may even look for deals of its own as an acquirer. Akamai had a 10% bounce with the market on Tuesday, but that was because it was among the worst performers and those down the most tend to bounce the most when the market bounces.

The biggest question is what the value will be ahead.  Thomson Reuters is expecting that earnings will be $1.45 EPS for 2011 on sales of $1.14 billion, representing only about 2% earnings growth on 11% sales growth over 2010.  The 2012 targets are expected to be $1.62 EPS and $1.27 billion in sales.  It is growth, but is it enough to acquire?  The answer depends upon which larger carrier could milk more growth and leverage out of the Akamai network.

Akamai and other content delivery and bandwidth players have been the subject of many market rumors for mergers and buyouts over the last few years.  The space has also consolidated.  Still, Akamai was worth even more in early 2007 than its peak in late 2010 and the value is only a fraction of what it was back in the tech and internet bubble that popped in 2000.

Netflix is another stock that lost well over half of its value.  Could Reed Hastings suddenly accept a buyout after a huge price drop?  His shareholders would revolt faster than his customers did over the price structure.  A drop in price alone cannot generate a successful takeover scenario.  Not unless enough time passes that the shareholder base changes and where the new shareholder base owns shares at a much lower average price.

JON C. OGG