Packeteer Mulls Semi-Hostile Bid

WAN optimization vendor Packeteer has agreed to consider a bid by a key shareholder to take over the company with a view to making major changes.

Early this morning, investment fund Elliott Associates L.P., which together with several of its subsidiaries owns 9.8 percent of Packeteer's common stock, registered a note to Packeteer's board of directors with the SEC. It's an offer to purchase Packeteer for about $5.50 per share in cash, roughly $200 million.

The letter is also a complaint about Packeteer's execution: "We believe Packeteers poor performance -- as reflected in the 37% decline of its stock price year-to-date and 67% decline over the past twelve months -- is the result of weak execution in terms of selling and developing its industry-leading products."

Packeteer's performance has indeed suffered. In its year-end financial report on Jan. 31, the company reported slightly lower revenues of $144.5 million for 2007, compared with $145.1 million for 2006. But there also was an annual net loss of $25.9 million or 72 cents per diluted share, compared to net income of $4.9 million, or 14 cents per share for 2006.

Elliott, a firm that is notorious for its aggressiveness as an institutional investor, says Packeteer has ignored repeated suggestions and pleas for action. "As you know, over the past year, we have written you numerous letters, spoken with several of you many times and talked at length with management regarding our concerns about the Company," today's letter states. "Despite our efforts, we have never received an invitation to discuss our thoughts with the Board and, more importantly, the Board has never formally addressed our concerns, which we suspect are shared by most of your other shareholders."Elliott isn't clear about what it proposes to do about Packeteer's problems. That said, the financial firm threatens to approach other shareholders to solicit a hostile takeover bid if Packeteer doesn't respond favorably to its offer. "[I]f you choose not to engage with us, we are prepared to proceed promptly with an offer directly to your shareholders," the letter states.

Elliott could have a number of endgames in mind for Packeteer, including attracting another buyer, changing management, or splitting up the company and selling it for parts -- any of which might help.

"Packeteer in general has been losing share over the last year. They missed a major technology transition," says Gartner analyst Joe Skorupa. Since the first quarter of 2005 until today, he notes, the supplier's market share has dropped from about 40 percent to about 10 percent.

More importantly, Skorupa says Packeteer's share of the fastest-growing WAN optimization segment, which Gartner calls the "Advanced Platform segment," is less than 5 percent.

While competitors like Riverbed have shifted to new platforms capable of a wider range of applications for WAN optimization wares, Packeteer hasn't really changed its proprietary, closed operating system, Skorupa asserts. As a result, it's achieved most recent revenue with its older, core assets, while falling behind in key growth areas.According to Skorupa, the Elliott letter could benefit Packeteer by generating interest from another potential buyer. "Elliott obviously has something in mind. They believe they can make a change," Skorupa says.

The Elliott letter appears to have goosed Packeteer's stock price, which soared 1.08 points today, nearly 28 percent, and was trading at $4.93 at press time.

But at least one industry analyst thinks Packeteer may not be able to find a satisfactory savior -- outside of Elliott.

"Elliott Associates’ offer is very cheap... Unfortunately, the company appears to have been passed over in the recent industry consolidation wave and we doubt if any interested strategic buyers will come forward now and significantly improve upon the current bid... Net, net, we foresee a near-term boost to the stock price and a negotiation stalemate," writes analyst Steven Freitas of BMO Capital Markets in a note today.

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