Top Tech Takeover Targets
By James Altucher
Stockpickr.com
Many tech companies are ripe for acquisition. They have a ton of cash, generated both from profits and the over-exuberant IPO market of the late 90s. They have increasing cash flows due to the ever expanding need for all things Internet (content, connectivity, computational power), and there are many natural buyers:
Cisco (CSCO), Oracle (ORCL), Microsoft (MSFT), Google (GOOG), Symantec (SYMC), EMC (EMC) and others are all making multi-billion dollar acquisitions. They are flush with cash and don’t know what to do with it other than to attempt to dominate the world through more acquisitions.
Private equity – There’s one trillion dollars cash lying on the sidelines that has to be put to work within the next three to five years. Private equity firms don’t buy shares. They buy companies.
Themselves – Many of the targets I identify below are already doing share buybacks, in effect, quietly taking themselves private.
At Stockpickr.com we’ve identified 15 companies that fit the criteria that make a takeover a slam dunk at current values. See the link to the right for our full list. See below for some of the companies we’ve identified, plus analysis:
Akamai Technologies (AKAM):
Akamai is a perfect company to get acquired by Cisco, particularly after its recent acquisition of WebEx at 15 times cash flows, which provides IP-based video conferencing for the enterprise. When the Internet was just blossoming, it was simply enough to get your information from your computer out into the world beyond. And that is what Cisco was great at with their first major product, their routers.
But now with the audience fully matured and demanding video (e.g., WebEx), the companies that speed up the last mile of transmission of Web content will become increasingly valuable. Akamai is the leader in this area.
Akamai takes content (for instance, your Web site) off of your local hosting service and distributes it across the world so that whoever wants your content will have to take as few hops as possible to find it. At 15 times cash flows, Akamai trades exactly in line with where WebEx was trading when Cisco acquired it.
And I’m not the only one who thinks so. Super hedge fund manager and former George Soros protégé Stanley Druckenmiller owns shares of Akamai. Druckenmiller was running Soros’s fund in 1992 when he pulled the trigger on the trade that became famous for “breaking the bank” in England. That day, the pound reached a 20-year low as a result (many believe) of Soros and Druckenmiller’s machinations. Now he’s loading up on Akamai.
United Online (UNTD):
What!? A declining, old school, dial-up Internet service provider? Most people don’t realize that United Online has quietly been building one of the largest social networks around, Classmates.com. All of United’s profit growth comes from Classmates.com. Also, United’s cash flows are immense. Let’s look at the basic numbers: A $932 million market cap and $162 million cash in the bank with no debt, giving it an enterprise value of $770 million. With operating earnings of $154 million, United trades at just five times cash flows.
The situation reminds me of Ask Jeeves which was trading for seven times cash flows right before Interactive Corp. (IACI) bought it for a 20% premium. The Classmates.com asset is too huge to ignore with traffic doubling every year. Consequently, United’s content and media division posted a 33% revenue increase when compared to the year ago period in its most recent quarter. Additionally, United pays out a 5.7% dividend, making it the highest yielding tech company that I track.
Again, it’s interesting to see who is looking past the stigma of the “dialup services provider” label that has plagued United among Wall Street analysts. Quant-driven Renaissance Technologies owns 4.2% of the stock. According to Trader Monthly magazine, Jim Simons the manager of Renaissance, made between $1.5 billion and $2 billion for himself last year, tying for number one on the list of the top earning hedge fund managers. Renaissance has consistently posted 30%+ returns since its inception 20 years ago. At Stockpickr, we track Renaissance’s holdings and you can track them as well with the link to the right.
Intuit (INTU)
Intuit, through its QuickBooks software and various tax packages, provides financial management and tax solutions to small business, consumers, and accountants. This would be a perfect latch-on for Oracle since it is primarily catering to large businesses but is starting to face competition on the small business end from MySQL. Intuit would be a great foot in the door for Oracle to get in the small business. Microsoft has also long been rumored to have an eye on nabbing Intuit.
Intuit trades at 11.5 times cash flows and has almost $1 billion net cash in the bank. Analysts expect earnings per share to go from $1.37 in the fiscal year ending July 2007 to $1.58 per share in fiscal 2008. Interestingly, Renaissance Technologies also is a believer in Intuit’s prospects, owning $94 million worth of the company. My theory on Renaissance is that they have modeled out the returns gained by buying stocks with heavy amounts of cash, little debt, and low multiples over cash flows, hence their investments in companies like United and Intuit.
Cold Cash
As an aside, several years ago I applied for a job at Renaissance. A friend of mine who ran a fund of funds told me that they had a very statistics-oriented approach. “They even model out what happens to the market when there’s a blizzard outside.” Ok, I thought. I can do that. So I created the “Blizzard System” for Stockpickr.com that answers the question, “what does the market do when there is more than five inches of snow on Central Park.” See the link to the “Blizzard System” on the right. I wrote to Jim Simons and had a nice back and forth with him but, alas, they only hire Ph.D.s and I unfortunately had been thrown out of graduate school. But that’s another story.
Over the next year many technology and Internet companies are going to get acquired. Suddenly investors will look around for tech stocks and they’ll realize that the supply of technology shares that trade on the markets are severely depleted. This is a precondition for the next bubble, when demand begins to greatly outstrip supply. That bubble will be created by the enormous liquidity that is on the sidelines right now but will be moving into the market over the next year.
James Altucher, founder and CEO of Stockpickr.com, author of the book, "Trade Like Warren Buffett", and partner at Formula Capital |
