Must-know: AQR Capital Management’s 1Q14 positions

Part 2
Must-know: AQR Capital Management’s 1Q14 positions (Part 2 of 6)

Why AQR Capital starts new position in Riverbed Technology

AQR Capital and Riverbed Technology

AQR Capital opened new positions in the quarter—the notable ones being Riverbed Technology Inc. (RVBD) and Nordion Inc. (NDZ). It sold off positions in LyondellBasell Industries (LYB), Marvell Technology Group (MRVL), and Vodafone (VOD).

RVBDEnlarge Graph

The fund started a new position in Riverbed Technology Inc. (RVBD) which accounts for 0.23% of its 1Q14 portfolio.

Riverbed Technology provides application performance infrastructure products. The Riverbed Application Performance Platform (APP or platform) is a set of integrated solutions that give companies the flexibility to host applications and data in the locations that best serve the business. The company believes its solutions dramatically improve application performance, reduce IT costs, and substantially increase business agility.

The networking-equipment maker has two product lines. The Application Acceleration product line includes wide area network (WAN) optimization products, such as Steelhead and SteelFusion (formerly Granite), Stingray virtual application delivery controllers (ADCs), and Whitewater cloud storage delivery products. The Performance Management product line includes application-aware network performance management (NPM), application performance management (APM), network engineering, operations and planning (NEOP), and network simulation and modeling products. The Performance Management product line combines the former Cascade products and the products acquired from OPNET Technologies Inc. (OPNET).

Riverbed rejects two takeover offers from Elliott Management 

Paul Singer’s hedge fund Elliott Management offered to buy Riverbed in January for $3.08 billion, or $19 per share, in an effort to initiate a bidding war for the company. The activist investor has a 10.6% stake in San Francisco-based Riverbed. After the initial offer was rebuffed by Riverbed, Elliott raised the offer price from $19 per share  to $21.00 per share in cash. Riverbed rejected the second offer, saying it “believes the proposal undervalues the Company and is not in the best interests of shareholders.” An unconfirmed Bloomberg report said in March that Riverbed has attracted $25 a share informal offers from PE firms Silver Lake Management LLC, Thoma Bravo LLC, and KKR & Co. However, chief executive officer (or CEO) Jerry Kennelly maintained the company had received no “credible” offers.

RVBD hedgeEnlarge Graph

Elliott wants Riverbed management to engage in dialogue

Elliott has reaffirmed its $3.36 billion offer and in a June 9 letter urged the company to engage in dialogue. Elliott said that at Riverbed’s annual meeting held at the end of May, “shareholders overwhelmingly voted down the company’s proposals and voted off the director up for reelection.” The letter added, “We are one of Riverbed’s largest shareholders, and the fact that this board hasn’t responded to our request for a simple meeting is unprecedented in Elliott’s history. Despite complaints from other shareholders and public criticism from leading shareholder advisers ISS and Glass Lewis, Riverbed Directors Mark Floyd, Chris Schaepe, Kim Stevenson, Michael Boustridge, Eric Wolford, and CEO Jerry Kennelly have done nothing to address the severe governance issues at Riverbed and the need to rectify its significant stock-price underperformance. Riverbed is experiencing a governance crisis. It is long past time for this Board to stop stonewalling shareholders and engage with us to find a path forward.”

A previous letter from Elliott said, “Whether defending poor corporate governance, maintaining an inefficient cost structure, or refusing to engage with the significant acquisition interest in the Company, it’s painfully obvious that this Board is fully entrenched and has absolutely no desire to maximize value for shareholders.”

WAN optimization drives revenue growth

Riverbed’s 1Q  results missed on revenue but beat on earnings. Total generally accepted accounting principles (or GAAP) revenue was $265 million—up 8% compared to 1Q13. GAAP net income was $3.3 million, or $0.02 per diluted share, compared to a net loss of $8.1 million, or ($0.05) per diluted share in 1Q13. It said, “Year-over-year revenue growth was led by WAN optimization and strength in enterprise and international sales. We are also very encouraged by our performance management business with increasing revenue from channel partners and significant growth in Europe.”

For fiscal 2013, revenue grew by 24% to $1 billion from $836.9 million in 2012 with a significant portion of the growth coming from acquisitions. The company said it aims to “expand our product portfolio to deliver a broader and more strategic value proposition to our customers and gain share in the $11 billion application performance infrastructure market.”

In March, Riverbed was recognized as a “Leader” in Gartner’s 2014 “Magic Quadrant for WAN Optimization.” According to Gartner, “the WAN optimization market remains dynamic, with new solutions to support various cloud solutions for SaaS and infrastructure as a service (IaaS) deployments, broader support for virtual WOC solutions and a general decline in WAN bandwidth pricing.” In the WAN optimization market, Riverbed’s main competitors include Cisco Systems, Blue Coat Systems, Citrix Systems, and F5 Networks.

The Realist Discussions