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Published: August 19, 2010
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.
Long-term implications
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).
-- David Sterman
Staff Writer
StreetAuthority |
