We downgrade our recommendation on Polycom Inc. (PLCM) to Neutral ahead of its second-quarter 2011 financial results, solely based on its current valuation.The stock price has soared 155% last year. We believe Polycom is fairly valued at present.
Nevertheless, despite facing competitive pressure from Cisco Systems Inc. (CSCO), which acquired Tandberg TV, Polycom’s high-margin Network Infrastructure Systems businesses grew 25% in the previous quarter. Strong momentum of the Network Infrastructure division is a significant positive for Polycom since this division drives overall margin of the company.
We believe long-term fundamentals of videoconferencing industry remain compelling. The global economy has just started recovering and business enterprises are restricting their respective travel budgets as a cost control measure. This makes Polycom’s HD telepresence solutions a cost-induced alternative in an increasingly interactive world.
Polycom has decided to acquire Accordent Technologies Inc., a leading provider of video content management and delivery solutions for $50 million in cash. Accordent's software division will be incorporated in the Polycom UC Intelligent Core group and will be reported along with Polycom's Network Infrastructure revenues.
According to Polycom, this transaction will be accretive to its 2012 earnings. The acquisition will allow Polycom to access 1,200 clients of Accordent, especially in the enterprise and public services domain. Several analysts estimated that the deal with Accordent will increase Polycom’s market opportunity by $500 million.
In another significant move, Polycom has decided to purchase Visual Collaboration Business of Hewlett Packard Co. (HPQ) that includes its Halo Products and Managed Services for $89 million in cash. Acquisition of HP’s video conferencing unit will enable Polycom to expand into lucrative desktop and mobile video conferencing market. Halo Products will help Polycom to differentiate its offerings from its closest rival Cisco. The deal is expected to get regulatory approval by the third quarter of 2011.
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