Tech deal reboot exemplifies valuation disconnect

July 11, 2016

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Overpriced Silicon Valley unicorns aren’t the only technology-sector valuation oddities. Polycom, a struggling videoconferencing company, and Canadian rival Mitel Networks just created one by scrapping their merger deal.

Paul Singer’s Elliott Management originally played matchmaker. Last October, the activist hedge fund bought stakes in Polycom and Mitel and urged them to unite. With Polycom as buyer, Elliott reckoned the stock would more than double in a couple of years. About six months later, the idea came to fruition, albeit with the smaller Mitel acquiring Polycom for $2 billion.

The cash-and-stock deal offered a 22 percent premium to Polycom shareholders, who also would have owned three-fifths of the enlarged entity. An anticipated $160 million of annual synergies, worth some $1.3 billion once taxed and capitalized, should have foretold plenty of upside.

Even so, as often happens with technology companies generating little or no growth, investors were unimpressed. Polycom’s revenue had tumbled 10 percent and its operating income by a third since 2011. Mitel lost money in each of the last three years. Both are under threat from larger competitors such as Cisco as well as from new workplace communication tools offered by the likes of Facebook and Slack.

With the deal worth 20 percent less than when it was struck, Polycom last week decided to abandon it in favor of an all-cash offer from private-equity firm Siris Capital. The price is 9 percent lower per share than the original Mitel bid, and Siris will keep all the benefits of any savings. Yet shares of both public companies rose on the news. Though part of that was down to investors who bet on deal prospects unwinding their positions, the episode exemplifies the strange prism through which investors see tech opportunities.

In addition to the riches heaped on fast-growing startups like Uber, Microsoft can pay a 50 percent premium to buy a weakening but hyped LinkedIn for $26 billion, promise no synergies and still receive a warm reception from the market. A company like Polycom, with dubious prospects, is rewarded more generously for facing its struggles in private than embarking on a money-saving merger with another public company. The same logic used to build tech products doesn’t always get applied when valuing them.

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