Internet equipment giant Cisco could be a leading candidate to acquire F5 Networks following reports the company has hired Goldman Sachs to help it evaluate offers it has recently received, according to a leading analyst firm.
MKM Partners reckons Cisco Systems Inc. (Nasdaq: CSCO) would attach considerable value to the technical and management expertise within F5 Networks Inc. (Nasdaq: FFIV), which develops application delivery networking technologies.
"F5 has a much better and more complete application networking and application security platform than the ACE server load balancing blades that Cisco previously stopped selling," said MKM Partners analyst Michael Genovese in a research note distributed earlier today. "There may be other companies with interest, but we single out Cisco because it is the one in our coverage that makes the most potential sense."
A spokesperson for Cisco said the company "does not comment on rumors or speculation" when approached by Light Reading.
Cisco would likely face competition from private equity players besides other "strategic suitors," according to Genovese. "The company has a very sticky services revenue stream and strong margins and cash flow, which makes it a good private equity target," he said.
His remarks came after F5 was reported by Reuters to have recruited Goldman Sachs to assess bids and following recent upheaval within the F5 organization.
Longstanding F5 executive John McAdam retired as CEO of the company in July last year, but Manny Rivelo, his successor, was forced to quit in late 2015 due to reports of personal misconduct.
McAdam agreed to take over while F5 found a permanent replacement but in March revealed he was "back for good," reported Reuters.
In the meantime, there has been some concern in the analyst community about the long-term prospects for F5. "The cloud has proven to be a threat as well as an opportunity," said Genovese. "Because of the secular challenges, we expect the company's new product cycles will likely be more muted than prior cycles."
F5's share price rose by 12.6% on the Nasdaq yesterday, to $123.94, following the Reuters report, giving the company a market capitalization of about $8.3 billion. MKM Partners has also increased its 12-month "fair value estimate" to $118, from a previous figure of $106, saying "the M&A speculation could have some legs."
F5 reported revenues of $483.7 million for the three months ending in March, 2% more than in the year-earlier period, but saw net income fall from $85.7 million to $75.4 million over the same period because of patent litigation costs.
In March, F5 was ordered to pay $6.4 million in damages to Radware Ltd. (Nasdaq: RDWR) after a court found it had infringed on the rival company's intellectual property.
F5's key competitors include Citrix Systems Inc. (Nasdaq: CTXS), Blue Coat Systems Inc. (Nasdaq: BCSI) and A10 Networks Inc. , but MKM's Genovese reckons the A10 platform is "nowhere near as strong as F5's from either a technology nor market penetration perspective."
— Iain Morris, , News Editor, Light Reading