Keynote Systems, Inc. (KEYN), Adobe Systems Incorporated (ADBE): What Does This Transaction Mean and How Can You Benefit?

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Investors have yet another reason to watch for developments out of Silicon Valley over the coming weeks and months. Keynote Systems, Inc. (NASDAQ:KEYN) recently announced that it had agreed to be taken private by private equity firm Thoma Bravo for a significant premium over its pre-announcement stock price. The nearly $400 million deal would give the struggling firm a chance to restructure its operations beyond the prying eyes of analysts and investors.

Keynote Systems, Inc. (NASDAQ:KEYN)

Given the relatively small nature of this transaction and the lack of regulatory issues surrounding it, market-watchers expect it to close by the end of the third quarter of 2013. Although there is a chance that this timetable could be affected by legal challenges or an unexpected shareholder revolt, investors should not actively bet against it. With a decent arbitrage premium and some potential synergies in the offing, this deal warrants closer scrutiny.

Keynote Systems, Inc. (NASDAQ:KEYN) and Some Tough Competitors

Keynote Systems, Inc. (NASDAQ:KEYN) is by no means the leader in its field. In fact, the company must compete with several large rivals that have dominant market positions and diversified operational structures. Its two most noteworthy direct competitors are Adobe Systems Incorporated (NASDAQ:ADBE) and JDS Uniphase Corp (NASDAQ:JDSU).

These two competitors are both far larger than Keynote Systems, Inc. (NASDAQ:KEYN) itself. Adobe Systems Incorporated (NASDAQ:ADBE) has a robust market capitalization of nearly $23 million and an enterprise value of over $20 billion. For its part, JDS Uniphase Corp (NASDAQ:JDSU) has a market valuation of $3.3 billion and an enterprise value of just under $3 billion. These figures dwarf Keynote Systems, Inc. (NASDAQ:KEYN)’s respective tallies of $365 million and $191 million.

Keynote Systems, Inc. (NASDAQ:KEYN)’s earnings also leave something to be desired. In 2012, the company reported gross revenues of about $124 million but eked out a profit of just $2.5 million. By comparison, Adobe Systems Incorporated (NASDAQ:ADBE) posted earnings of $565 million on total revenues of about $4.3 billion for a far stronger profit margin of 13.3 percent. Then again, JDS Uniphase Corp (NASDAQ:JDSU) struggled across the finish line with total revenues of $1.7 billion and an after-tax loss of $62 million. All three of these companies have solid balance sheets that feature relatively little in the way of long-term debt. Of the three, JDS Uniphase Corp (NASDAQ:JDSU) appears to be the most overvalued: Its 3.2 price-to-book ratio persists despite its full-year loss in 2012. By contrast, Adobe Systems Incorporated (NASDAQ:ADBE)’s 3.34 ratio seems fairer. Keynote’s 1.53 figure might slightly undervalue a company that does not appear to be in dire financial or operational straits.

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