KeyBanc Says Sell Akami With Takeover Seen As Unlikely

Shares of Akamai Techonologies (AKAM) are sliding after KeyBanc analyst Brandon Nispel downgraded the stock to Underweight, a sell-equivalent rating, saying he sees a takeover as unlikely and believes the stock’s valuation is “elevated.” Yesterday, his peer at JPMorgan had raised his price target for Akamai after analyzing the company’s strategic alternatives following activist Elliot Management’s filing in December and Tuesday’s media report suggesting that Akamai is exploring strategic options.

STRATEGIC REVIEW: Earlier this week, Bloomberg reported that under pressure from activist investor Elliott Management, Akamai is working with financial advisers to look into strategic alternatives, including a possible sale. The company is said to be working with Morgan Stanley on the strategic review, the report noted.

SELL AKAMAI: In a research note to investors, KeyBanc’s Nispel downgraded Akamai to Underweight from Sector Weight, with a $51 price target. The analyst noted that Elliot Management’s involvement and the company’s purported strategic review increase the likelihood of a takeout and put a higher focus on removing costs, which is “dearly needed,” but will take time. A strategic buyer is much more likely than a financial buyer, given the potential for operating and capital expense synergies, he contended. Furthermore, the analyst noted that while there could be a long list of potential acquirers, there are also smaller, more nimble startups that are less expensive and could be a better fit than Akamai. Overall, Nispel sees a takeout as unlikely given the company’s current “elevated” valuation, deteriorating fundamental profile, and less expensive alternative assets available. Nonetheless, he estimates that under a leveraged buyout scenario, Akamai could receive a 20%-25% premium.

TARGET UPPED AT JPMORGAN: Meanwhile, JPMorgan analyst Sterling Auty raised his price target for Akamai Technologies to $75 from $58, while reiterating a Neutral rating on the shares. In light of the activist investor filling in December and the news report suggesting that the company is working with an investment bank to explore alternatives, the analyst said that he explored three separate scenarios- Akamai being a standalone company and improving in fundamentals, a leveraged buyout, or a strategic acquisition. According to Auty, these alternatives suggest stock prices of $84, $84 and $80, respectively, for the end of 2018 or at the time of transaction. While he acknowledged that there is no guarantee of a positive outcome through the strategic review process, Auty argued that he is encouraged by management taking the process seriously, which could likely result in some changes that improve margins going forward.