Monday, August 20, 2012

Technology Companies Set for a Takeover

This is the second article on some potential technology takeover targets. The first article is linked here).

Weak markets always bring up opportunities and none more so than in the M&A space. Whilst it’s never a good idea to solely buy a stock for its takeover potential, I think that potential acquirers are looking at exactly the same valuations that other investors are. Naturally, their decision is more motivated by strategic concerns, so in this article I’m going to stick to discussing firms on good evaluations and with a key rationale for the acquirer.

To do this properly, we also need to look at who might be doing the acquiring. I’ve identified six names. Their net cash positions and market capitalizations are shown below.

CompanyMarket Cap ($bn)Net Cash ($bn)

Facebook and Microsoft Go Mobile?

Ever since the Facebook (NASDAQ: FB) IPO took place, analysts have increasingly focused on the question of how Facebook is going to monetize mobile?  Google’s acquisition of Motorola Mobility appears to have shown the way, so the press speculation over a similar Facebook move is understandable. All of which, makes Research in Motion (NASDAQ: RIMM) and Nokia (NYSE: NOK) candidates for a bid. I don’t think either company is ideal, but if Zuckerberg is intent on buying a mobile phone company than realistically these are the best options. RIMM would require a significant amount of restructuring and is a brand in decline, but Facebook doesn't strike me as a company with any deficit in belief over its own social appeal.

I think Nokia would be a more interesting buy for Facebook. The Finnish company still has huge appeal in emerging markets and, if Zuckerberg believes he can increase Facebook’s penetration rates by marrying his company with Nokia then a deal could be possible. Another potential buyer for Nokia (or RIMM) is Microsoft (NASDAQ: MSFT). Nokia already runs Windows and, if Nokia continues to suffer, then a Microsoft deal makes sense. Nokia has a lot of cash on the balance sheet so an acquirer maybe convinced it could be restructured by using that cash. Samsung has also been mentioned as a potential acquirer, but they recently issued an official statement saying that the rumours were not true.

Will the Force Always Be With You?
Larry Ellison spooked the tech markets in the winter when Oracle gave weak results and he blamed the macro-environment for the company’s shortfall. Some investors didn’t quite see it like that. I think there is a structural change occurring in the enterprise software market. Cloud based solutions are gaining market share and I would take Oracle’s purchases of RightNow and Taleo as well as SAP’s purchase of SuccessFactors is implicit recognition of this.

Salesforce (NYSE: CRM) has achieved outstanding growth and, given Oracle’s cash and acquisitive nature, it would not stretch the company to buy it. However, Ellison has already responded and set his stall behind the ‘Oracle Cloud.’

Microsoft could also be a potential acquirer, but given that it is a fierce competitor with its Microsoft Dynamics CRM solution, any deal would likely be subject to regulatory scrutiny. Google has even been mentioned but this would be an aggressive foray into business software when Larry Page has enough on his hands with managing the transition to mobile based internet usage.

For now, Salesforce looks safe but should another technology behemoth want to make a move into business software than Salesforce will be the first company it looks at.

Microsoft Gets Sage?

While Salesforce may not be the perfect acquisition for Microsoft, I think another company fits the bill very well. The UK’s Sage is a leading provider of business software to the SMB market. It competes with Intuit and Microsoft in accounting, payroll and tax software. There are two main reasons why I think a deal makes sense.

First, the price is right. Sage generates huge amounts of cash flows (around $440m in free cash flow last year) and with an Enterprise Value (EV) of around $4.82bn and an EV/EBITDA multiple of around 8.5, it is not expensive.

The second reason lies behind the cause of the cheap evaluation. Sage has been left behind by the likes of Intuit in terms of shifting its solutions to the cloud. In fact, Intuit is a wonderful example of what could be achieved by a Sage acquirer. By shifting solutions to SaaS, Intuit has managed to reduce churn rates and lower operating expenses. Margins have got better.
Now why couldn’t Microsoft do this with Sage? I appreciate that Greece was viewed to have had sound finances the first time someone mentioned a Sage/Microsoft deal, but I think this could be the year for this deal. The opportunity to leverage Sage's solutions to the cloud is a big one and they appear to need a hand in doing it.

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