Many tech companies have cash-rich balance sheets, but thanks to super-low interests rates that money is doing almost nothing to create shareholder value. The solution for many companies is to buy a competitor or a company that is achieving fast-growth. The returns that can be generated from a solid acquisition are likely to far exceed the rates earned in company bank accounts. Plus, since valuations are at historically low levels for many companies, it is now one of the best times to acquire other companies.
According to a recent Inc. Magazine article, the tech sector accounted for about 20% of all merger and acquisition deals in the second quarter and the deal activity remains healthy even as global concerns persist. The article states:
"The number of tech sector deals decreased from 65 deals in the first quarter to 55 in the second quarter, a 15% drop according to the M&A Insights report released by accounting firm PricewaterhouseCoopers on Monday. However, the cumulative value of tech M&A activity jumped to $31.8 billion. That's an 8% increase from the previous quarter and a 35% increase from the same quarter last year."
Since interest rates are likely to remain low for the foreseeable future, and since many tech companies are trading at historically cheap levels, the deals are likely to continue. Here are two companies that have been considered to be attractive acquisition targets by some analysts and investors in the recent past. (An acquisition would probably be at a premium to the current share price, giving investors a potentially solid gain):
Palo Alto Networks, Inc. (PANW), which recently went public, already has a Citigroup (C) analyst talking takeover. This company is a fast-growing provider of network security which is becoming an increasingly attractive industry for tech companies to target. A Citigroup analyst believes that IBM (IBM) or Cisco Systems (CSCO) could find this company to be an attractive takeover target. Palo Alto Networks could give a suitor a fast-growing entry into the next-generation of network security and prevent this smaller company from becoming a potentially large competitor in the future. Both IBM and Cisco have billions in cash on the balance sheet, and both have been known to make acquisitions in the past. One caveat is that the Citi analyst thinks there might not be a deal for this company until it resolves litigation that is pending with Juniper Systems (JNPR). The lawsuit is over claims for patent infringement with a trial date set for February 24, 2014, according to the Mercurynews.com. However, there is always a chance of a settlement and that could come much sooner, along with a potential deal for the company. Palo Alto Networks sports a very high price to earnings ratio, so if this company has an earnings or guidance miss, or an unfavorable resolution to the legal challenges, the stock could be poised for a major decline.
Key Data Points For Palo Alto Networks From Yahoo Finance:
Current Share Price: $59.80
52-Week Range: $51.10 to $64.36
Dividend: none
2012 Earnings Estimate: 34 cents per share
2013 Earnings Estimate: 28 cents per share
NVIDIA Corporation (NVDA) is a leading designer and manufacturer of specialized graphic chips which are used in computers, tablets, mobile devices and other electronics. It recently released the world's fastest consumer graphics card for use in specialized gaming computers. The company recently announced better-than-expected earnings and it provided strong guidance which was in part due to the new "Tegra" chip. The company earned $119 million, or 19 cents a share, down from earnings of $151.6 million, or 25 cents a share, in the same quarter last year. However, analysts had only expected earnings of 14 cents a share. After the earnings report, a handful of analysts provided updated price targets which range from $14 to about $24 per share. NVIDIA has been considered as a potential takeover target, with Intel (INTC) as a possible suitor. Compared to cash sitting in the bank, Intel would probably generate much higher returns for shareholders if it acquired NVIDIA, plus it would acquire valuable patents and technology which would advance its foothold in gaming computers and mobile devices. Even if there is no acquisition of NVIDIA, there appears to be no major downside risk because the shares are reasonably priced and analysts expect the company to grow earnings by about 20% over the next year. This stock has been rising lately, so patient investors might want to wait for a pullback before considering a buy.
Key Data Points For NVIDIA From Yahoo Finance:
Current Share Price: $14.59
52-Week Range: $11.47 to $16.90
Dividend: none
2012 Earnings Estimate: 80 cents per share
2013 Earnings Estimate: $1.03 per share
Data is sourced from Yahoo Finance. No guarantees or representations are made. Please consult a financial advisor before making investments.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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