Seeking Alpha
Research analyst, tech, micro-cap, contrarian
Profile| Send Message|
( followers)

Forget inventing new technology. When large companies desperately need to innovate to stay alive, they're buying new tech instead!

This mentality is on full display in one corner of the market right now. We've seen over $30-billion worth of smart grid-related mergers and acquisitions in the last two years, according to Greentech Media.

Now, if you feel like you missed the boat on these opportunities, don't worry. The buying spree isn't ending anytime soon. Plus, a straightforward metric exists to pinpoint the companies most likely to be acquired next. The latest reading puts two firms squarely in the takeover crosshairs.

A Shortcut to Innovation

So what's going on in the smart grid space? It's simple… Our nation's energy infrastructure remains terribly outdated and in need of an overhaul. That's what. Despite all the technological advancements in the last hundred years, some of the electrical grid in use originated back in the 1880s.

Big players realize the only way to remedy the situation is to innovate. Fast. And the only way to do that is via acquisitions. Given the daunting task involved to go from a "dumb" grid to a "smart" one, we should expect this trend to continue for some time, too.

Here's a simple way to identify the most likely takeover targets…

Follow the Leader Patents

In today's uber-competitive and litigious world, a technological innovation is only marketable - and, in turn, valuable - if it's protected by patents. It's no surprise, then, that as the need for smart grid technologies intensified, so did the number of patent applications for related technologies.

In fact, a study conducted last year by patent analytics firm, Relecura, found that smart grid-related patent applications soared more than 1,500% in less than two decades. In 1993, there were roughly 400 international patent applications for smart grid-related technologies. By mid-2010, the number rose to almost 6,700.

Global Smart Grid Patent Applications

Now, it stands to reason that if a significant amount of patents are concentrated within smaller firms, those firms naturally become takeover targets. For suitors, the companies represent the chance to get gobs of intellectual property for a relatively small sum.

Well, Relecura approximated patent ownership by company. I say "approximated" because patent offices don't keep impeccable records of patent transfers and sales. Thus, the actual patent counts might vary slightly.

While this isn't a "precise" approach, as IAM Magazine's Jack Ellis writes, "What the report's authors have recognized is that the smart grid industry is a fertile area for such transactions to take place." Indeed!

Moving on to Relecura's findings, we see some expected leaders.

Behemoths like ABB Ltd. (NYSE:ABB), General Electric (NYSE:GE), and Siemens (OTCPK:SIEGY) topped the list of most smart grid patents, globally. (ABB holds an estimated 1,085 patents, GE boasts 923, and Siemens owns about 526.)

At the same time, however, two small-cap companies also appear in the top-15 smart grid patent owners. That makes them obvious takeover targets, given clear technological leadership.

Smart Grid Takeover Target #1: Silver Spring Networks (NYSE:SSNI)

Founded in 2002, Silver Spring holds 127 patents worldwide. If we focus only on U.S. patents, which tend to be the most valuable, the company boasts an impressive 61 patents, plus 41 patent applications.

Despite a highly anticipated IPO back in March 2013, the stock is struggling, down over 40% from the $17 offering price. The company's recent results were likewise underwhelming.

But a dip in price - and an uncertain future - often prompts suitors to make an offer. They could easily afford Silver Spring, too. It carries a market cap of less than $500 million.

Given the poor share price performance and weak business results recently, the best way to play the likelihood of a takeover here would be with some cheap February 2015 call options. In other words, consider risking a little to make a lot.

Smart Grid Takeover Target #2: Itron, Inc. (NASDAQ:ITRI)

Founded in 1997, smart metering leader, Itron, Inc., holds 280 patents worldwide. Based on the most recent data, the company's U.S. patents stand at 233 with another 97 applications on file. Although the company's market cap is higher than Silver Spring's - at $1.55 billion - it's still an attractive and affordable target.

Again, since we're talking about speculating on a possible takeover, I'd consider buying some cheap February 2015 call options here, as well.

Disclosure: None