Shares of content hosting pioneer Akamai Technologies (AKAM) are up $8.01, or almost 14%, at $65.79, continuing after-hours gains from Friday, when activist firm Elliott Managementdisclosed after market close that it has taken a 6.5% stake in the stock, and that it intends to talk with Akamai management about the fact the shares are “significantly undervalued.”
That has resulted in a flurry of activity on the Street today, among which is a report from Credit Suisse’s Brad Zalnick.
Zalnick raises his rating on the shares to Outperform from Market Perform, and hiking his price target to $75 from $55, writing that the Elliott entrance is ” an unexpected catalyst that can unlock several paths to value.”
That could result in a “change in narrative,” writes Zalnick, namely moving people away from focusing on the “declining media segment” to instead focusing on the “real asset value – the optionality of the underlying network.” He thinks several companies could be interested in querying the company, perhaps up to $80 per share.
Zalnick doesn’t say who those buyers might be, just ” multiple financial and strategic buyers.” He also offers an LBO analysis that “suggests a financial buyer could pay $80 per share and achieve a 20% IRR over 5 yrs.”
Akamai, in Zalnick’s view, has “many of the hallmarks of former Elliott Management success stories in the space,” writes Zalnick, including the “strong fundamental value proposition to customers” of what it does, the “unique technology advantages” it has, and the “eroding value proposition to shareholders.”
For instance, Zalnick identifies general and administrative costs that are something he thinks are “inefficient” at Akamai:
In comparison to the cost structures of other North America-based publicly traded software companies, Akamai’s G&A expense has been well in excess of peers. Akamai’s G&A is 320bps higher as a percentage of revenue than the next highest North- American software company with over $1bn in revenues (i.e. Autodesk) and 790bps higher than the average of software companies with over $1bn in revenues.
Zalnick explains the underlying “architectural” appeal of Akamai’s network, which helps the “core” of the Internet deal with the exploding number of requests from servers at the “edge” of the network: