Polycom Inc: Potential Activist Target and 10 Things I like About the Name

(Market Cap $1.85B)

Polycom is one of the key players in open, standards-based unified communications and collaboration (UC&C) solutions for voice and video collaboration.

Some key points that made me take notice when I saw that Starboard Value LP had taken a new position in Polycom shares in Q3-2013: 

  1. The stock has significantly underperformed the S&P 500 and the Russell 2000 over the past few years.
  2. The company has consistently generated healthy free cash flow over the past ten years.  Total FCF during this period has amounted to approximately $1.2B.
  3. Polycom recently accelerated its stock buybacks, at a very opportune time, in my opinion (see SSM alert dated Sep 14, 2013).
  4. Its cost structure has got totally out-of-whack, even when compared to its own historical financials.  EBIT margin has fallen to high single digits compared to high double digits a few years ago.  Management has stated that getting back to HDD EBIT margin is its top priority.  Most of the margin deterioration has been below the gross margin line and I think it was largely self inflicted.
  5. It has a clean balance sheet with a net cash position of approximately $200M.
  6. Its specific sector has gone through major consolidation over the past few years with Cisco buying Tandberg in 2010 and recent merger of Astra with Mitel.
  7. It’s trading at a historical low EV/Revenue of approx 1.0 while in a down cycle.  In the past 10 years, its EV/Revenue has averaged 2x.
  8. Its revenues have been impacted by multiple headwinds which appear to be cyclical, not structural.  Two main issues that have recently impacted Polycom, its competitors as well as a lot of tech companies are Federal Government budget (as in, the idiots haven’t passed one in years) and a slowdown in China/emerging markets.
  9. Management is being revamped – this could be a double-edged catalyst but I think it’s more positive than not.  CEO was recently let go due to mixing personal expenses with the company’s – good riddance as the cost structure got out-of-whack under his watch.
  10. As I mentioned earlier, Starboard has taken a new position in it – 3% of the Fund’s total as of 9/30/2013.
    While this doesn’t guaranty that Starboard will necessarily take an activist role here, I see it as a big positive given the Fund’s recent successes (AOL, ODP etc).

Key risks that I can see (1) macro headwinds turn out to be deeper or last longer than I currently assume (2) The Board is in the process of hiring a new CEO and I wonder if the new CEO will want to kitchen-sink numbers? (3) Polycom and Cisco have a near-duopoly in this business and you know which one of the two has deeper pockets.


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