[3/4/98 Microsoft Investor article. ASND takeover rumor]
investor.msn.com
Excerpt: "Still, the money managers we queried
agreed that watching money flow into a
given stock -- particularly those stocks
trading well below 52-week highs -- is a
key to determining takeover candidates.
Bedford, who also provides
investment-advisory services to
institutional and retail clients,
mentioned Ascend Communications
(ASND), Shiva Corp. (SHVA) and LSI
Logic (LSI) as stocks with such
characteristics."
A Merger-Mania Treasure
Map
The unruly pace of tech acquisitions is
sending stock prices sailing. Here are
some ways to dig for potential targets.
By Aaron Task
An unprecedented tide of mergers and
acquisitions in the high-tech sector is
driving up the prices of both target
companies and would-be targets -- and
generating an endless game of
speculation over which firms will go
next.
Treasure Map
A guide to digging
up merger
prospects
More than $49 billion of mergers and
acquisitions involving high-tech firms
have emerged so far in 1998, according
to Securities Data Corp. -- a 35% jump
from the total for all of last year's first
quarter.
Given the eye-popping gains registered
by stocks involved in recent
transactions, it's no wonder investors
want to get a head start on the next
deal.
Consider:
On Monday, a bid from Siebel
Systems (SEBL) sent the stock
of rival Scopus Technology
(SCOP) up $4.50, or 32%.
On Feb. 17 alone, separate
takeover bids sent shares of
Devon Group Inc. (DEVN) rising
$14.13, Coherent
Communications (CCSC) up
$7.38, and Continental Circuits
(CCIR) jumping $6.885.
Among some bigger deals (and
would-be deals) of late,
Computer Sciences (CSC)
climbed nearly $12 when
Computer Associates (CA)
touched off what would descend
into a hostile offer for the
computer-services provider.
Digital Equipment (DEC) gained
$10 on Jan. 26 after rising
sharply in the days prior to
Compaq Computer's (CPQ) $9.6
billion buyout.
Spotting potential takeover targets is
clearly an inexact science, and most
professionals say focusing on the
acquirers is a sounder long-term
strategy than speculating on firms that
look ripe to be taken out. But takeover
plays do, indeed, share some common
elements, and the lure of those
deal-inspired gains is hard to resist.
"Companies with
a strong product
line and a
depressed price
are obvious
candidates for
mergers and
acquisition."
-- Terry Bedford,
hedge-fund manager
After all, coming up with a sure-fire
system to find takeover targets "would
be the Holy Grail if you could do it,"
said Terry Bedford, a hedge-fund
manager and president of Bedford &
Associates in Toronto.
Putting his skepticism aside, Bedford
said, "Obvious candidates are the
stocks that have been beaten up and
have big bases. Companies with a
strong product line and a depressed
price are obvious candidates for
mergers and acquisition."
The Urge to Merge
Since we're inveterate creators of stock
screens, we decided to screen for the
next big M&A target. Before divulging
the criteria and results, though, here's a
quick recap of some of the elements
that are heating up merger fever this
year:
It's the stock market, stupid.
This cuts two ways in
technology. Many acquiring
companies have taken advantage
of the stock market's historic bull
run in recent years to use their
own inflated stocks as
"currency" to make acquisitions.
Conversely, the technology
sector was perhaps hit hardest
by the worries about Asia's
financial meltdown. Though the
Nasdaq Composite Index has
recouped all its lost ground and
then some, the advance has
been concentrated in the bigger
names. Many small and
medium-sized technology stocks
remain well below the highs hit in
the spring of 1997 and thus look
like bargains to acquiring firms.
Size counts. The
large-capitalization names in
technology are in favor among
investors for reasons beyond
their familiarity and liquidity.
More than ever, technology
experts say, it is the market
leaders in given sectors that are
going to survive and prosper. "It's
harder and harder for anybody
who is not top-tier to come from
below and take a position," said
Bret Rekas, technology analyst
at BancAmerica Robertson
Stephens. "It's hard to put the
pieces together and gain that
critical mass and become a
full-service provider. If I'm not a
top-three-to-five player in a given
segment, I've got to question
why I'm here."
If you can't build it, buy
someone who can.
Technological advances are
coming faster than ever. Even
the biggest companies cannot
afford to devote the resources
necessary to stay on the cutting
edge of development in all
segments of the industry.
Oftentimes, it makes more
sense for the bellwether firms to
acquire their R&D rather than do
it in-house, making smaller firms
with "hot" new technologies
attractive targets. Cisco
Systems (CSCO), particularly, is
known as a master of this art.
"I think the best thing to look for in each
sector of technology is what the new
emerging technology is," said Roderick
Berry, co-manager of the Robertson
Stephens Information Age Fund. "If you
can find a small public company
working on solutions in a hot new
emerging area, it will likely be an
acquisition target."
Year 2000 Index vs.
S&P 500
Where the Plays Are
Berry said service-oriented software
companies, firms working on solutions
to the Year 2000 bug, and companies
involved in chip-design technology, such
as Cadence Systems (CDN), are good
candidates. Data-networking and
telecom-equipment firms are also areas
to investigate, he said. Of particular
interest are firms involved in
cutting-edge areas like gigabyte
Ethernet switching, as well as wave
division multiplexing, in which a single
strand of optical fiber is split into
numerous channels.
Money flow into
a given stock --
particularly
those stocks
trading well
below 52-week
highs -- is a key
to determining
takeover
candidates.
But Berry was loath to name names
and agreed with most professionals we
queried that figuring out which stocks
are likely candidates for takeover -- and,
hopefully, portfolio-bursting gains -- is a
dicey proposition at best.
Still, the money managers we queried
agreed that watching money flow into a
given stock -- particularly those stocks
trading well below 52-week highs -- is a
key to determining takeover candidates.
Bedford, who also provides
investment-advisory services to
institutional and retail clients,
mentioned Ascend Communications
(ASND), Shiva Corp. (SHVA) and LSI
Logic (LSI) as stocks with such
characteristics.
Determined to broaden the universe of
potential tech takeover plays, we
created a set of criteria to expand on
the theory. We searched for stocks with
average daily trading volume in the past
two weeks and month that was higher
than their average for the past year,
combined with lower-than-average
relative strength over the past three- and
six-month periods. To find ones with
basing patterns, we looked for stocks
that have not advanced in the past
quarter. We wanted this company to be
fundamentally healthy, however, so we
looked for solidly profitable companies
that are generating a return on equity of
greater than 10% and have net profit
margins better than 5%. We also
wanted these stocks to be trading
within 50% of their 52-week low.
Without further ado, our potential
tech-merger class of March '98:
Adaptec (ADPT), Award Software
International (AWRD), Intevac (IVAC),
Alladin Knowledge Systems (ALDNF),
Jetform (FORMF), Unitrode Corp. (UTR)
and Eltron Corp. (ELTN).
Each of the names, of course, has its
own unique story to tell, land mines to
avoid, and potential gains to be reaped
if a deal were to be proposed. As
Bedford says, to find takeover plays you
also "have to have a fundamental bent.
Look at the company's product line and
say, 'Is this something someone else
wants, and does it fit?' "
Next week, we'll dissect each of these
stocks individually to see which, if any,
among them are really ripe for the
picking. For you do-it-yourselfers out
there who can't wait to get at 'em,
happy hunting -- and let us know how
your search turns out.
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