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
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,
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
NetApp (Nasdaq: NTAP)
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
Dell (Nasdaq: DELL)
may be interested. Ironically, both of those firms are expected to
weigh in with
after the market closes today, and you can expect this topic to
come up in the companies' conference calls.
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)
Blue Coat Systems (Nasdaq: BCSI)
-- David Sterman
David Sterman started his career in equity research at Smith
Barney, culminating in a position as Senior Analyst covering
European banks. David has also served as Director of Research at
Individual Investor and a Managing Editor at TheStreet.com. Read
Disclosure: Neither David Sterman nor StreetAuthority, LLC hold
positions in any securities mentioned in this article.
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