Throughout the summer, a clear theme has emerged. High-tech companies have reported generally solid results, and yet shares in the sector keep drifting down toward 52-week lows. Despite their considerable cash balances, investors have grown increasingly concerned that sector growth will stall out. That's why Intel's (Nasdaq: INTC) just-announced decision to buy security software vendor McAfee (NYSE: MFE) is so important. It's a clear sign that these tech titans will use their balance sheets to help alleviate those growth concerns.
Short -term implications
The fact that Intel is paying a +60% premium to Wednesday's close tells you that private market valuations are often far higher than the value these companies are getting as public entities. It's also noteworthy that Intel's offer of $48 a share is just above McAfee's 52-week trading range. Generally speaking, buyout offers must exceed that threshold to avoid accusations that a company is being sold on the cheap while it is out of favor.
Then again, McAfee's shares haven't seen $48 since the dot-com era of 1999. McAfee's board would have been hard-pressed to reject this offer, though the lofty purchase price likely means that other suitors are unlikely to emerge.
The move is a curious one for Intel as it represents a shift away from hardware and into software. And Intel is probably not done: McAfee is probably seen as one of several pieces that can be brought together to provide a broad software platform. If Intel makes another move, it could be in the areas of data storage software or "cloud computing," which involves the use of many networked computers to boost storage and increase processing power. Names to watch include VMWare (NYSE: VMW), NetApp (Nasdaq: NTAP) and Citrix Software (Nasdaq: CTRX).
Notably, shares of McAfee rival Symantec (Nasdaq: SYMC) are up more than +10% on this news. Symantec focuses on both network security and data storage. The company's stock has been out of favor for more than five years, as I noted recently. [Read: 3 Beaten-down Tech Stocks Set for a Rebound]
If Symantec is indeed "in play," then firms like Hewlett-Packard (NYSE: HPQ) and Dell (Nasdaq: DELL) may be interested. Ironically, both of those firms are expected to weigh in with earnings after the market closes today, and you can expect this topic to come up in the companies' conference calls.
As noted above, Intel's deal could spark fresh interest in tech stocks. In many respects, the industry is ripe for an M&A boom, which is always good for valuations. Companies tend to make acquisitions when organic growth is weak and shares are languishing. Many executive compensation packages are tied to rising stock prices, and historically speaking, buying new revenue streams and then paring costs have been a sure-fire way to boost the bottom-line -- and the stock price.
Action to Take --> Purchasing a stock simply because it is a buyout candidate is always a bad idea. Most rumored deals never actually take place, and those rumors are offered by traders simply looking to pump up a stock before dumping it.
Instead, you should buy a stock primarily based on attractive valuations or organic growth prospects. A potential acquisition is simply another reason to find shares appealing. That said, small to mid-sized tech companies that could offer new market opportunities for bigger tech players include Netscout Systems (Nasdaq: NTCT), Integrated Silicon Solutions (Nasdaq: ISSI), Websense (Nasdaq: WBSN) and Blue Coat Systems (Nasdaq: BCSI).