Shiva and Shake
Intel buys networker Shiva

by Jeff Fischer (TMFJeff)

ALEXANDRIA, VA (Oct. 19, 1998) -- Intel (Nasdaq: INTC) rose after announcing plans to acquire former darling networker, Shiva Corp. (Nasdaq: SHVA), in a move to expand its networking product line. If approved, Intel will pay $185 million, or $6 per share, for Shiva. Shiva's stock rose 29% to $5.50, leaving fifty cents, or nearly 10%, on the table for arbitrage players. (Which, by the way, isn't us.)

Intel's focus on small and medium-sized businesses when it comes to networking is complemented by Shiva's line of product. The relatively small networker sells remote-access hardware and software that permits wandering computer users to connect with office computers, wherever they are. Its products include remote-access servers and access switches, as well as management and network control products for Internet providers and telephone carriers. The company also sells Ethernet network servers.

Shiva achieved $144 million in 1997 sales, 90% of which were derived in North America. Remote access products accounted for 90% of revenue. Having grown sales consistently from a 1992 starting point of $16 million, last year revenue declined from 1996's high watermark of $200 million, while gross margin declined from 58% to 50%. When profitable in 1995 and 1996, Shiva achieved operating margin of between 10% and 12%. With no debt and a recent balance of $58 million in cash, the company has a book value of $3.88 per share, so Intel isn't paying too much of a premium.

Being squeezed on all sides by primarily 3Com (Nasdaq: COMS) and Ascend Communications (Nasdaq: ASND), Intel might represent the kiss of life for Shiva. And Shiva shouldn't hurt Intel. Intel's networking sales are currently estimated to be in the hundreds of millions of dollars range, paling in size to its total $25 billion in sales last year. Another $150 million in networking sales and customers that Intel might leverage -- hey, that can't hurt.

Shiva seems to be a decent acquisition at this price, too, for Intel anyway, because Intel's return on investment in Shiva could easily be stronger than the return that much of Intel's pile of cash-on-hand might be earning in short-term investments, or wherever some of it is sitting. And once acquired, Intel might stop the apparent flight of customers from Shiva.

Customers typically avoid purchasing product from a technology company if they fear the company is in danger of disappearing, or falling behind the technology curve. Intel can assure customers that Shiva won't disappear and that customer support and generations of new and improved products will continue to be available for customers. (Not that Shiva was in real danger of disappearing by any means, but declining sales and 3Com's growing market share in certain niches do indicate an exodus from Shiva that Intel might stem, and then build from.)

There are rumors that Intel is interested in buying other networking companies, the most frequent rumor involving $11.5 billion, number two networker, 3Com. Intel does want to diversify its product beyond microprocessors, which still account for about 90% of sales, so any complementary acquisition, perhaps, is possible. Fools don't buy stocks on rumor alone, though -- of course. Fools buy on the merits of a company when it's standing alone.

Today. The Drip Port was three for four as all stocks rose -- including Mellon Bank -- except for Johnson & Johnson. We should own one giant, big share of Mellon Bank by now, and perhaps we'll receive the DRP account papers soon.

In its history, the Drip Port has now saved $2,000, much of which is invested in stock and has gone on to earn $126 already, or 6.3% based off the portfolio's current total base of $2,000. (That includes all start-up costs. Without those, the port would be up over 10% historically.) Using a Value Per Share accounting method, however, the numbers still show a negative historical return because earlier investments have pulled their weight less than newer investments, and newer investments are given less weight in the performance numbers.

The rest of this week we'll talk some about Johnson & Johnson (NYSE: JNJ) and then move onto our new subject: Oil.

If you have questions, please visit the Drip message boards linked in the top right of this page. Finally, for more Foolish reading tonight, Fool Port addresses the newly emerging business of off-line retailing. (Huh?)

Have a Foolish evening!

--Jeff Fischer

FoolWatch -- It's what's going on at the Fool today.

10/19/98 Close

Stock Close Change JNJ 82 13/16 -5/16 INTC 85 +1 1/4 CPB 57 3/4 +3/4
Day Month Year History Drip 0.84% 4.29% 16.86% (0.48%) S&P 500 0.57% 4.46% 9.48% 11.67% Nasdaq 1.71% (2.66%) 4.99% 3.45% Last Rec'd Total # Security In At Current 09/02/98 8.027 CPB $52.867 $57.750 09/01/98 9.727 INTC $80.238 $85.000 10/07/98 7.850 JNJ $71.405 $82.813 Last Rec'd Total # Security In At Value Change 09/02/98 8.027 CPB $424.36 $463.56 $39.20 09/01/98 9.727 INTC $780.50 $826.82 $46.32 10/07/98 7.850 JNJ $560.53 $650.08 $89.55 Base: $2000.00 Cash: $186.08** Total: $2126.54

The Drip Portfolio has been divided into 85.474 shares with an average purchase price of $23.399 per share.

The portfolio began with $500 on July 28, 1997, adds $100 on the 1st of every month, and the goal is to have $150,000 in stock by August of the year 2017.

**Transactions in progress:
9/21/98: Sent $77 to buy/enroll in MEL.