Packeteer's Prospects Face Hurdle of IRS
12.07.2007 04:41
Computers
- Source: Forbes
Packeteer Inc., a company in a healthy market with good technology, has been nothing but frustrating for shareholders, with some having thrown in the towel altogether. Packeteer's shares have fallen nearly 40 percent year-to-date, and investors wiped nearly $60 million off their value on one day at the end of June, after the company disclosed that the U.S. Internal Revenue Service claimed Packeteer owes $171 million in taxes and penalties, more than the cash it has on hand. The company's market value now stands at $291 million, according to FactSet. But the Cupertino, Calif., company, which sells technology that helps the transmission of data files across secure corporate networks, is undervalued, analysts and other shareholders maintain, and could start to gain back market share it has so far lost to a host of competitors. It is also ripe to be acquired and would make a good combination with large companies' technology products whose distribution networks will help sell Packeteer's products. It isn't as though Packeteer is a technology laggard. It was first into the wide-area network, or WAN, optimization space back in 1996, and made a series of acquisitions in that segment to bolster its operations. But companies such as Cisco Systems Inc., Juniper Networks Inc., F5 Networks Inc., and Citrix Systems Inc. and, most notably, Riverbed Technology Inc. have provided ample competition as customers increasingly move their servers out of their branches and into one key site. Packeteer recently reported a first-quarter loss of $6.09 million from a year-ago profit of $4.51 million, despite the fact that the market is growing at about 25 percent to 30 percent per year, according to some estimates. Packeteer is hoping the now-nearly $1 billion market will be more friendly to it as a result of its iShaper, a new product introduced in May that offers a unified networking appliance for companies seeking to have greater computing performance at their branch offices. Packeteer collaborated with Microsoft Corp. on developing iShaper. Teamed up with a bigger player like Microsoft, Packeteer could boost its marketing prowess, which has so far suffered. Packeteer's stock is also cheap. It trades at around 25 times Wall Street's anticipated earnings over the next 12 months, compared with 84 times for rival Riverbed and 33 for its sector, according to FactSet. Packeteer's shares rose 9 cents, or 1.1 percent, to close at $8.20 Wednesday. The stock's 52-week high was $13.96 on Dec. 29, while the low was $7.33 on July 2. The shares' poor performance has also increased the pressure on Packeteer to reverse course and start delivering value to shareholders. A group including Elliott Associates LP, an activist group, in May took a 6.3 percent stake in Packeteer and said it wants the company to look for a buyer. At that time, the New York-based investment manager said it believes Packeteer has "leading technology" in one of the fastest growing segments of the networking market, but has proven "unable to capitalize on such technology." Elliott also said it believes the business segment in which Packeteer operates is becoming "increasingly competitive," and that the company's technology may prove "extremely valuable to a larger acquirer looking to enter the wide area network optimization market" or to supplement its current product offering. On July 5, the group increased its stake to 8.6 percent of Packeteer's outstanding stock. Other shareholders agree. "Packeteer has been sort of frustrating - the market's been there for the taking but they kind of missed the opportunity - right now we feel that it's such a cheap company," said Tom Hardin of Lanexa Capital, which owns about 100,000 shares. In part, what has held Packeteer back, analysts say, is a reorganization of its sales force by management. The four most senior sales people left between June of last year and April of this year, according to Rich Sherman, managing director of equity research at MKM Partners, a research firm. The company has since added a new vice president of marketing in February and has heads of sales in place for all of its geographical regions. While the $122 million that Packeteer allegedly owes to the IRS, minus the penalties, seems daunting considering its cash balance of $84 million and revenue last year of $145.6 million, Packeteer will likely pay less than that in a settlement with the government, analysts say. The dispute involves the pricing of assets transferred between Packeteer and a subsidiary in the lower-tax jurisdiction of the Cayman Islands in 2003 and 2004, according to analysts. Packeteer declined to provide specifics but said the problem involves valuation of acquired assets by a foreign subsidiary and it intends to protest the claims. Billy Choi, an analyst with Jefferies & Co., said the amount claimed by the IRS seems disproportionate to Packeteer's cumulative revenue for the years in question. He estimates the company will settle for around $6 million. Copyright 2007 Associated Press. All rights reserved. This material may not be published broadcast, rewritten, or redistributed
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