4 Tech Targets Primed For Buyouts

Technology industry analysts sense a groundswell coming.

#-ad_banner-#A series of factors have set the stage for a potentially very busy summer of deal-making. And with some creative thinking, you can get a sense of which smaller companies might soon become buyout fodder.

You know that it’s a strange time in the tech sector when Apple (Nasdaq: AAPL), which almost always focuses on tiny tuck-in acquisitions, shells out $3 billion for Beats Audio.

Around the same time that deal was being drawn up by lawyers and bankers, the rumor mill buzzed with a possible Google (Nasdaq: GOOG) purchase of Yelp (NYSE: YELP). Shares of Yelp zoomed just more than 30% to $68 in the last three weeks of May, but if no such deal is announced soon, shares may drift lower.

Still, a Google/Yelp linkup makes ample sense. 

Google loves to generate product and service reviews, which lead to great ad sales. Google did acquire restaurant ratings firm Zagat in 2011, though that deal hasn’t been able to derail Yelp’s torrid growth and segment leadership. Google allegedly tried to acquire Yelp for $500 million back in 2010 before it went public, though Yelp is now worth $5 billion and would likely need a solid premium to walk down the aisle. Still, for an online platform that is expected to grow at least 40% in 2014 and 2015, Google may have no choice but to pay a premium if it wants leadership in this niche.

Yelp is just one of a group of young tech firms that would give a quick boost to a well-heeled parent. Here’s a look at a few others.

1. Microsoft (Nasdaq: MSFT ) and Pandora (NYSE: P )​

Quite suddenly, Apple, Google and Microsoft are in an arms race to see which of their operating systems can power the next generation in-car entertainment systems.

Apple can offer its proprietary iTunes (along with the acquired Beats streaming service), Google can offer Google Play… and Microsoft can offer, well, nothing. 

Streaming audio is a gaping hole in Microsoft’s product lineup (remember Zune?) as it seeks to take market share in tablets, phones, and now automobile entertainment systems. Yet there’s no way that Microsoft can build a robust service from scratch.

Pandora is currently doing a lot of heavy lifting to flesh out its service, including the hiring of many more local sales people to beef up advertising revenues. Pandora’s rapid 40% fall to $24 still leaves a current $5 billion market value. Pandora knows that the Apple/Beats deal ratchets up the pressure in that space, and a sale to a larger better-heeled partner may be the logical next step.


2. IBM (NYSE: IBM ), Oracle (NYSE: ORCL ) and Splunk (Nasdaq: SPLK )​

Back In January 2013, Bloomberg news reported that both IBM and Oracle had their eyes on fast-growing Splunk, a provider of analytics tools for Big Data, the massive volumes of information created every day on the Internet.

But IBM and Oracle failed to move quickly, and shares likely got away from them. This young company eventually became worth more than $10 billion.

Yet shares of Spunk, which breached the $100 mark on an intra-day basis in late February, are now worth just $41. Broken company? Not hardly. Splunk recently reported a perfectly respectable fiscal first quarter (April) and remains on track for 35% revenue growth this year and next. Yet this stock lost all of its momentum simply because management is no longer sharply boosting forward guidance as it had in the past, and merely reiterating it. In the world of $100 tech stocks, that counts as an unpardonable gaffe.

What do analysts think? A few think shares are now close to fair value, because shares aren’t inexpensive on a price-to-sales basis, while many others reiterated a view that more than 50% upside remains for this lagging stock, solely based on a long-term path of high growth.

Oracle and IBM don’t care about price targets or guidance trends. They simply care about the health of a business, its industry market positioning and long-term growth potential. And Splunk looks quite appealing in that context, despite the dismal stock price.​


3. Seagate (Nasdaq: STX ) and Fusion-io (NYSE: FIO )​

Pair a tech giant with plenty of cash but limited growth prospects and a young tech upstart that is about to release cutting edge new products but struggles to become profitable on a standalone basis and you have a match made in heaven. That’s at least what the rumor mill suggested a year ago regarding disk-drive maker Seagate Technology and flash storage company Fusion-io.

Such a deal never came to pass, likely because Fusion-io was still reeling from an internal mess related to an executive departure. Analysts now think Fusion-io has its house in order, highlighted by an imminent launch of new products that have a reported six-month lead on the competition.

Risks to Consider: Many rumored deals never come to pass, so you should never buy a stock simply based on buyout rumors. But an identification of a company’s potential worth in an merger and acquisition (M&A) scenario can be included as part of your valuations analysis.

Action to Take –> All three of these targets hold great appeal on their own merits even before to the consideration of any deal. If they are acquired, it is merely potential upside for an already solid investment.

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