Reasons for the Tech Buyout Frenzy – And Who’s Next

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Wall Street has been abuzz with buyout news. Thursday’s announcement that Intel (NASDAQ: INTC) will buy McAfee (NYSE: MFE) for nearly $8 billion in cash made a huge splash last week – and Monday’s move from tech giant Hewlett-Packard (NYSE: HPQ) to outbid Dell (NASDAQ: DELL) for small-cap data storage firm 3Par (NYSE: PAR) really threw the tech sector for a loop.

All this merger mania is making things interesting for tech stock investors, as industry experts speculate on the next buyout targets and analysts do some Monday morning quarterbacking over whether the buyouts are good or bad ideas. 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.

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 it’s important to understand first of all the reasons why acquisitions make so much sense.

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?

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 his or her money.

Acquisitions Replace Organic Growth. Few prospects for ensuring future profits and sales keep moving up? Then buy a business that’s doing those things well. Intel saw the writing on the wall when it comes to the move towards 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 smartphone stock Palm and overtures at storage and cloud computing power 3par.

Positive PR Buzz. If all shareholders are hearing 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 being just another struggling stock.

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. (NASDAQ: GOOG) 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. Get the complete list of Google buyouts here.

Following the logic of Intel, a likely buyer in the near future could be Cisco (NASDAQ: CSCO), 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 (NASDAQ: MSFT). MSFT has almost $40 billion in cash, but the closest thing the company has to a groundbreaking new technology is the upcoming Kinect motion controller for its Xbox video game console. IBM (NYSE: IBM) 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 (NASDAQ: NTAP) 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 heavyweight Cisco is worth over $120 billion and IBM is worth over $150 billion, a NetApp buyout isn’t impossible. Another big player Juniper Networks (NYSE: JNPR) is in the same boat with a $14 billion price tag, though its focus is more on routing and network infrastructure.

Smaller but more digestible networking, data storage and cloud computing stocks are the likeliest to make the merger list. Brocade Communications (NASDAQ: BRCD) 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 and IBM, which you can bet are closely watching the bidding war over PAR stock. Other small-cap tech targets in the data storage game could include Isilon Systems (NASDAQ: ISLN), Compellent Technologies (NYSE: CML) and CommVault Systems (NASDAQ: CVLT).

But as we saw in Intel’s bid for McAfee and Hewlett-Packard’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 (NYSE: BHP) and its hostile bid for ag giant Potash Corp. (NYSE: POT) late last week.

One thing is sure, however: 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.

As of this writing, Jeff Reeves did not own a position in any of the stocks named here.

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Article printed from InvestorPlace Media, https://investorplace.com/2010/08/reasons-for-tech-buyout-frenzy-who%e2%80%99s-next/.

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