NEW YORK--(BUSINESS WIRE)--Elliott Management Corporation (“Elliott”) today sent a letter to the Board of Directors of Riverbed Technology (NASDAQ:RVBD) increasing its offer to acquire all of the outstanding shares of common stock of Riverbed for a price of $21.00 per share in cash.
Elliott, affiliates of which collectively own or have economic exposure to approximately 10.5% of the common stock and equivalents of Riverbed Technology, Inc., is a multi-strategy investment firm with deep experience investing in public and private companies.
Full text of the letter follows:
“February 25, 2014
Riverbed Technology, Inc.
199 Fremont Street
San Francisco, California 94105
Attn: Jerry Kennelly, Chief Executive Officer and Chairman of the Board
Dear Members of the Board of Directors:
I am writing to you on behalf of Elliott Associates, L.P. and Elliott International Limited (collectively, “Elliott” or “we”), which collectively own or have economic exposure to approximately 10.5% of the common stock and equivalents of Riverbed Technology, Inc. (“the Company” or “Riverbed”), making Elliott one of the Company’s largest shareholders.
The purpose of today’s letter is to update you on our thinking regarding the Company and our perspectives on its future.
Since Riverbed’s Board rejected our January 8, 2014 offer of $19 per share in cash, the Company has announced its Q4 2013 earnings and Q1 2014 guidance. Throughout this time, Elliott has maintained a dialogue with Riverbed and with a number of other parties, including shareholders and other prospective buyers for the Company.
Unfortunately for Riverbed’s shareholders, our dialogue with Riverbed has yielded no indication that the Company understands the potential for a sale process to create a value-maximizing outcome for its shareholders.
Upon rejecting our previous offer, this Board stated that it would “carefully review any credible offer” as long it can “deliver value … in excess of” the Company’s status quo path. This statement is inconsistent with the Board’s decision to continue to ignore the substantial acquisition interest in the Company (at values well above our previous offer) that we know has been brought to the Board’s attention.
In light of the foregoing, Elliott today offers to acquire Riverbed for $21.00 per share in cash. We will not increase our offer any further in the absence of private diligence.
This offer, representing undeniable premium value far above the Company’s unaffected stock price of ~$16-$17 per share, demonstrates our commitment to the value-maximizing potential of Riverbed’s high-quality assets and its strategic positioning within its markets. It also represents our deep and abiding skepticism that a maturing technology Company whose efforts to diversify have resulted in significant lost value and whose stock has underperformed virtually every relevant benchmark over any time period since its IPO can offer superior value to stockholders on a publicly traded, standalone basis.
Our offer again contemplates entry into a merger agreement with a “go shop” provision that would allow the Board to solicit competing proposals for a period following execution of our agreement. Our proposal also remains subject to a confirmatory due diligence review of the Company which, with the cooperation of management, we believe can be completed within 30 days. With access to private diligence materials, we believe there is an opportunity to increase our current offer, which is based on publicly disclosed information only.
As a sign that the Board is serious about its commitment to remain open to value-maximizing offers, we again request that the Company provide us with an appropriate confidentiality agreement and allow us to commence our due diligence review immediately.
As mentioned above, we are keenly aware that other potential buyers have expressed their acquisition interest directly to Riverbed and its advisor, Goldman Sachs. These parties appear to be willing to offer materially more for the Company than we are. However, despite Riverbed’s statement that it would carefully review any credible offer, it is our understanding that Riverbed’s Board has thus far completely ignored these overtures. This understanding is based on the Company’s own direct admissions that a number of parties have expressed interest.
We believe shareholders, the actual owners of the Company, should be outraged by the Board’s behavior. The Board has been ignoring numerous potential buyers, and the Board has also bizarrely concluded that it is not worthwhile to allow these parties, including Elliott, to conduct a few weeks of diligence to put forth our highest and best offers for the Company. This behavior is inconsistent with the fiduciary responsibilities of a public company board, whose obligation is to maximize value for stockholders. Shareholders demonstrated their significant displeasure with the current Board by sending Riverbed’s stock down 5.5% yesterday when it became apparent that Elliott was not nominating new directors to replace some of the existing Board members.
Fourth Quarter 2013 Results and First Quarter 2014 Guidance
As justification for this further entrenchment (which began with the Company’s reflexive adoption of an antiquated and shareholder-unfriendly poison pill), the Board has offered shareholders nothing beyond Riverbed’s latest quarterly performance and promises regarding future growth of which shareholders have every right to be skeptical. Even taken at face value, this justification does not excuse the Board’s decision to deprive shareholders of the opportunity to benefit from a value-maximizing transaction with one of several interested buyers, including Elliott.
To summarize the backdrop against which Riverbed’s Board thinks providing very interested buyers with access to diligence is not worthwhile:
- Low-to-mid-single-digit revenue growth: At the midpoint of the Company’s guidance, revenues for Q1 2014 are expected to grow only 5% year-over-year.
- Virtually no growth in WAN optimization: WAN optimization, which is the Company’s largest business and represents over 70% of revenues, grew just 1% year-over-year in the fourth quarter, with growth in support and services revenues masking a year-over-year decline in product revenues.
- Operating expenses are excessive and getting worse: Operating expenses for the first quarter of 2014 are projected to be 58.5% of total revenue, the highest level of spending in over three years.
- “Illustrative plan” is unrealistic: Riverbed continues to make reference to its “illustrative operating plan” of consistent 10% revenue growth – something that the Board must realize is not actually being achieved. We cannot understand why the Board and management believe it is acceptable to tell shareholders they are modeling 10% revenue growth when they are actually guiding to a figure that is half that amount.
In our view, these performance metrics reflect a Company that is desperately spending money in a frantic effort to rejuvenate its moderating growth. As owners of a large amount of the Company’s stock, we find this alarming. For the first quarter of 2014, revenue is expected to grow 4% to 6% year-over-year while operating expenses are expected to grow 5% to 7% year-over-year. If Riverbed meets its first quarter guidance, then Q1 2014 will be the ninth quarter in a row in which operating expenses have grown faster than total revenue.
Furthermore, based on the “illustrative operating plan” from its recent analyst day, Riverbed is projecting to add $101 million to 106 million in additional operating expenses on top of the $110 million they acquired as part of the OPNT transaction, despite guiding to “$3 million to $4 million a quarter of synergies” as part of the transaction. We view this expenditure growth as excessive bordering on out of control, and it indicates to us a serious weakness in the Company’s justification for refusing to engage in a serious examination of alternatives to its status quo path.
Riverbed Board and Next Steps
Due to its decision to ignore the acquisition interest and to allow management to run wild with costs, this Board has chosen to “bet on execution” this year. Despite our strong disagreement with the Board’s judgment, we decided not to nominate directors before Sunday’s deadline. With only three directors up for election and with one of those three likely leaving the Board, the change that is needed at Riverbed cannot be best effectuated through alternative nominations at this time.
Nevertheless, in the likely scenario that the Company executes in the coming quarters as it has historically, then the Board will have yet again lost its “bet on execution” with a management team that has failed to execute. In such a scenario, the realities facing the Board would be stark:
Elliott and the other potential buyers for Riverbed who are interested now will have to re-evaluate Riverbed based on yet another several quarters of failed execution. The possibility that the value of the Company will suffer degradation between now and then is very real and represents a very real risk to shareholders.
|ii)||Shareholders, including Elliott, will effectively have to do the Board’s job for it by demanding and supporting an alternative Board and management that are focused on value-maximization.|
Given yesterday’s stock price movement and the numerous phone calls we received from shareholders who are supportive of change at the Board level, we believe the Board’s fate is in its own hands, and that the critical decisions determining that fate are the ones the Board will make now, not several quarters from now.
In 11 months, nominations will be open for the 2015 proxy season, and the current Chairman and CEO of the Company will be up for re-election. In the quarters between now and then, we believe shareholders will be extremely focused on execution. Of course, in the unlikely event that the Company executes flawlessly as it never has before, then as large shareholders, we would certainly be happy with that path to value creation as well. Either way, as evidenced by our long track record of successful investments in companies similar to Riverbed, the Board should be aware that we intend to remain fully engaged to ensure a value-maximizing outcome.
On behalf of the Company’s owners, it is our sincere hope that the Board chooses to fulfill its duty today rather than waiting until likely mis-execution puts it under enormous stress in the near future. The Board should immediately allow for potential buyers, including Elliott, to conduct diligence in order to put our highest offer on the table for all shareholders to review. In addition, the Board should urge the Company to take steps to address the alarming levels of spending at Riverbed, which several others on the Street have highlighted.
We remain prepared to meet immediately with you and your advisors in order to work out the details for moving toward a completed transaction, which remains the best path forward. As always, I remain personally available to answer any questions about our proposal you may have.
Very truly yours,
Cautionary Statement Regarding Forward-Looking Statements
The information herein contains “forward-looking statements.” Specific forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts and include, without limitation, words such as “may,” “will,” “expects,” “believes,” “anticipates,” “plans,” “estimates,” “projects,” “targets,” “forecasts,” “seeks,” “could,” “should” or the negative of such terms or other variations on such terms or comparable terminology. Similarly, statements that describe our objectives, plans or goals are forward-looking. Our forward-looking statements are based on our current intent, belief, expectations, estimates and projections regarding the Company and projections regarding the industry in which it operates. These statements are not guarantees of future performance and involve risks, uncertainties, assumptions and other factors that are difficult to predict and that could cause actual results to differ materially. Accordingly, you should not rely upon forward-looking statements as a prediction of actual results and actual results may vary materially from what is expressed in or indicated by the forward-looking statements.
About Elliott Management Corporation
Elliott Management Corporation manages two multi-strategy hedge funds which combined have more than $23 billion of assets under management. Its flagship fund, Elliott Associates, L.P., was founded in 1977, making it one of the oldest hedge funds under continuous management. The Elliott funds' investors include pension plans, sovereign wealth funds, endowments, foundations, funds-of-funds, high net worth individuals and families, and employees of the firm.