Unlock: Infoblox (BLOX) Getting Acquired by Private Equity

It pays to do fundamental research. Note below was sent to clients on August 22 with stock at $20. Getting acquired today by Vista Equity Partners for $26.50. Unlike many other speculators on Twittersphere, we never recommend buying purely on M&A speculation, unless the story is extremely compelling with strong fundamentals, such was the case with BLOX.

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Infoblox (BLOX) – Type of action that most traders wouldn’t care for but gets my attention. Ahead of earnings on August 31, unusual buyers of 333 April 20 call for $2.70 to $2.85 offer side. Approx $91,000 bullish bet on 2.7x daily average call volume with implied volatility pushing higher by +6.7% and stock setting up for breakout from tight bull flag. Previously, the biggest option trade currently in option chain is following risk reversal accumulated over the course of two days on July 14 and 15:

– 2,200 Jan’17 17.5-puts sold to open for $1.20 credit
– 2,200 Jan’17 22.5-calls bought to open for $1.25 debit

Lets look at timeline of events here:

— On April 25, stock shot up +6% after Starboard Value Fund disclosed activist 7% equity stake in the company.

— On May 12, stock shot up +23% in single day after Bloomberg reported M&A interest from private equity firm Thoma Bravo. The news was legit not a rumor.

— On June 1, stock short up +4% after Bloomberg reported the company has hired Morgan Stanley for activist defense and to advise on strategic options.

So, when will the company get acquired? Think likely only matter of time. But I never bet purely based on M&A. With Starboard and other private equity interest, the key with activist shareholders is always to increase operating margins. We saw first evidence of that on May 26 when BLOX guided FY2017 margins reaching 20%, well ahead of consensus view of 9.9% (the highest estimate on the street is 11%). Not reflected in FY2017 consensus view which have not changed for 9 months. Stock trades at 2.9x EV/Sales lowest in networking category with peer valuation at 4.2x. Growth has decelerated from high teens to +12% YoY which is a legit concern, hence the private equity interest.