Who's next in the tech M&A frenzy
Commentary: Why acquisitions make sense now
By Jeff Reeves
ROCKVILLE, Md. (MarketWatch) -- Wall Street is abuzz with buyout news.
The announcement that Intel Corp. /quotes/comstock/15*!intc/quotes/nls/intc (INTC 18.43, +0.15, +0.82%) will buy McAfee Inc. /quotes/comstock/13*!mfe/quotes/nls/mfe (MFE 47.35, +0.10, +0.21%) for nearly $8 billion in cash made a huge splash last week. Monday's move from tech giant Hewlett-Packard Co. /quotes/comstock/13*!hpq/quotes/nls/hpq (HPQ 40.34, +0.66, +1.66%) to outbid Dell Inc. /quotes/comstock/15*!dell/quotes/nls/dell (DELL 12.59, +0.23, +1.86%) for small-cap data storage firm 3Par Inc. /quotes/comstock/13*!par/quotes/nls/par (PAR 32.89, +0.01, +0.03%) also threw the tech sector for a loop.
All this merger mania is making things interesting. And given the fact that as of July nonfinancial corporations have $1.8 trillion in cash to burn -- roughly 25% more than when the recession began -- you can expect more cash buyouts in tech to emerge in the months ahead.
digits: Why it's not all rainbows for techDow Jones Newswires' Brendan Conway tells the Digits show why he thinks the recent spate of M&A activity in the tech sector may not be enough to ignite technology stocks.
There are a few logical buyout targets and a few obvious buyers in tech right now (we'll get to those in a moment), but first it's important to understand the reasons acquisitions make so much sense in the current market.
Cash is worthless
With interest rates at rock bottom levels and with the specter of high inflation ahead thanks to massive U.S. debt, it is literally bad business to sit on cash. A dollar is worth more today that it likely will be tomorrow -- so why not spend it via buyouts, buybacks or dividends? Read about the top 10 Dow dividend stocks
Depressed equity prices
In case you haven't noticed, stocks haven't exactly been surging. That means many companies are relative bargains compared with a few years ago so a buyer can get more for its money.
Acquisitions replace organic growth
Few prospects for ensuring future profits and sales keep moving up? Then buy a business doing those things well. Intel saw the writing on the wall about mobile devices, and decided to diversify away from hardware and processors with the McAfee deal. The story is similar with HP and its buyout of troubled smart phone stock Palm and overtures at storage and cloud computing power 3Par.
Positive buzz
If all shareholders hear is news about slumping equity prices and weak consumer spending, that's probably not a good sign. Even small-time acquisitions can help give investors something to feel good about, and prove that your company is building for the future instead of just struggling along sleepily.
Given all this, it's easy to see why companies are so eager to go on a shopping spree. But who are the most likely suitors?
Google Inc. /quotes/comstock/15*!goog/quotes/nls/goog (GOOG 470.30, +7.12, +1.54%) is always at the top of the list. The company is sitting on over $20 billion in cash and has positive cash flow to increase that balance every quarter -- with no dividends to sap the war chest. The company has a history of buyouts with over 70 acquisitions in the last decade, including a rash of 22 purchases in 2010 for $1.1 billion so far. Read a full list of Google buyouts here.
Following the logic of Intel, a likely buyer in the near future could be Cisco Systems Inc. /quotes/comstock/15*!csco/quotes/nls/csco (CSCO 21.04, +0.52, +2.53%) , which has over $30 billion in cash and may want to diversify away from its networking business into other high tech areas. Same for Microsoft Corp. /quotes/comstock/15*!msft/quotes/nls/msft (MSFT 24.29, +0.35, +1.46%) . The company has almost $40 billion in cash, but the closest thing it has to a groundbreaking new technology is the upcoming Kinect motion controller for its Xbox video game console.
IBM /quotes/comstock/13*!ibm/quotes/nls/ibm (IBM 127.58, +2.54, +2.03%) is also a likely suspect in the tech sector. In July, the company reported that it ended the second-quarter with over $12 billion on hand and a free cash flow of $3 billion.
Now let's get to the potential targets:
NetApp Inc. /quotes/comstock/15*!ntap/quotes/nls/ntap (NTAP 44.05, +0.98, +2.28%) could be a possible takeover target due to its strong business in data storage. As the tech sector goes through some big shakeups in the wake of the Intel-McAfee deal and the bidding war for 3Par, NetApp could be quite a counterpunch. One hang up, however, is that NTAP is worth a hefty $14 billion at current stock valuations. But when you consider the fact that tech heavyweights Cisco is worth over $120 billion and IBM is worth over $150 billion, a NetApp buyout isn't impossible.
Another big player Juniper Networks Inc. /quotes/comstock/13*!jnpr/quotes/nls/jnpr (JNPR 28.99, +0.71, +2.51%) is in the same boat with a $14 billion price tag, though its focus is more on routing and network infrastructure. Read about how to profit as semiconductor stocks short circuit.
Smaller but more digestible networking, data storage and cloud computing stocks are the likeliest to make the merger list. Brocade Communications Systems /quotes/comstock/15*!brcd/quotes/nls/brcd (BRCD 5.61, +0.01, +0.18%) has a market cap of about $1.6 billion and is essentially in the same business as 3Par. That makes it a good counterpunch for Cisco or IBM, which you can bet are closely watching the bidding war over 3Par. Other small-cap tech targets in the data storage game could include Isilon Systems Inc. /quotes/comstock/15*!isln/quotes/nls/isln (ISLN 22.17, +0.25, +1.14%) , Compellent Technologies Inc. /quotes/comstock/13*!cml/quotes/nls/cml (CML 18.56, +0.76, +4.27%) and CommVault Systems Inc. /quotes/comstock/15*!cvlt/quotes/nls/cvlt (CVLT 25.86, -0.25, -0.96%)
But as we saw in Intel's bid for McAfee and H-P's acquisition of Palm earlier this year, sometimes tech stocks will reach out beyond the most obvious choices in an effort to enter new areas of business or diversify their revenue stream. The next buyout targets may be a big surprise. And let's not forget that tech is hardly the only sector seeing shakeups - just look at mining giant BHP Billiton /quotes/comstock/13*!bhp/quotes/nls/bhp (BHP 70.80, +0.60, +0.85%) and its hostile bid for ag giant Potash Corp. /quotes/comstock/13*!pot/quotes/nls/pot (POT 148.50, -0.05, -0.03%) late last week.
One thing is sure. It just doesn't make sense for cash-rich blue chips to keep sitting on their cash. And that means we're sure to see many more buyouts in 2010
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