One way to outperform in the market is merger arbitrage. Today, we're taking a look at 5 potential tech buyout candidates for 2012. Some of these names could be targeted by Google Inc. (GOOG) which has recently been aggressive with its acquisition plans. These names have higher valuation multiples but that does not stop companies from offering a good price to their shareholders.
OpenTable Inc. (OPEN)
OPEN is a provider of real-time online reservation for diners, as well as guest management solutions for restaurants. The company has a network of around 22,000 restaurants across the 50 states and selected areas outside the United States. Shares of OPEN have declined by 31.16%. The stock traded as high as $11. The reason is that the company posted lower-than-expected quarterly figures. The market is concerned about the company’s business operations. The culprit could be higher expenses from expanding outside the US.
The current price of $49.64 implies a price earnings ratio of 29 times forward earnings. The stock does not come cheap and market has big expectations for the company to perform. In contrast, internet stocks like Websense Inc (WBSN) trades at only 11 times earnings and Google Inc (GOOG) is valued at 12 times earnings. GOOG has been on aggressively buying companies lately. It could easily buy OPEN with an enterprise value of $1.16 billion. This is only 7% of annual cash flow of GOOG. It recently acquired Zagat Survey, LLC which publishes surveys and reviews on different restaurants. This is in line with the business of OPEN and combining the businesses will be a good idea. Investors should be cautious though. The stock has a short interest of 28% of its float.
Akamai Technologies Inc. (AKAM)
Akamai Technologies Inc is a company that strives to improve content delivery and applications on the Internet. It traded as high as much as $300 back in the early days but has fallen dramatically. Investors holding this stock from its early trading days have lost 84% of their money. For the past 5 years, the company has grown its revenues by 29% but has negative earnings per share growth. For this year, the company grew its revenues by 17% and earnings per share by 23%. Its net margins are good at 17% and return on equity at 9%. Despite a strong performance for the last 5 years, its share price has declined by 53%.
The stock currently trades at 13.47 times next year’s earnings. The stock has a cash flow yield of 8%. Similar computer services firms like Digital River Inc (DRIV) trades at 45 times earnings and Sitestar Corp. (OTCQB:SYTE) has a lower earnings multiple at 8 times. This could also be another acquisition target of Google Inc (GOOG). The company has a market cap of around $3 billion and could be a good complement to the cloud business of GOOG. The stock is rated a buy from major brokerages.
ARM Holdings Inc ADR (ARMH)
Shares have increased 42%. For the past few years, revenues have grown by 12%, higher than the 8% growth posted by the industry. This translates to earnings per share growth of 16%. This is better than the growth rates of other players in the industry. The group posted negative growth rates during the same period. The main advantage of the company is just it does not own its manufacturing plant, but merely gives licenses to its products. This is primarily the reason why the company has better profit margins than other companies in the industry.
At the current price, the stock is trading at 43 times next year’s earnings and has a dividend yield of 0.50%. This is definitely higher than the company's peers. Advanced Micro Devices (AMD) trades lower at 8.11 times earnings and Intel Corp. (INTC) is valued at 8.97 times. INTC also carries higher dividend yield at 3.90%. It would be easy for both INTC and AMD to acquire ARMH at current prices, but it would not be an intelligent capital allocation decision. The company could easily spend less than $17 billion to start a product line rather than buy ARMH. Analysts are bullish on the stock but the price target of $25 has minimal upside.
Salesforce.com Inc (CRM)
Saleforce.com Inc is a company that is in the cloud computing space. It basically provides cloud computing services to other businesses on a monthly subscription basis. It sells its services through direct sales or through partners. The stock has steadily appreciated for the past 5 years. In fact, it has a 5-year return of 232%. During the same period, sales grew 40% and net earnings per share by 14%. Lately, sales have grown by 35% but posted a negative earnings growth. The stock is down by 9% for the year. The appeal of its services is that cloud computing is a cheap alternative for companies keen on saving money. It recently has been acquiring companies to beef up its product offering.
The stock does not come cheap. It is trading at 66 times forward earnings. This is higher than similar companies in the industries. Oracle Corp. (ORCL) is valued at 10 times forward earnings and has a dividend yield of 0.80%. The company could be acquired by Amazon Inc (AMZN) to aggressively expand its cloud computing offering. AMZN trades at higher valuation of 69 times earnings. What will hinder AMZN from buying CRM is valuation. There are smaller companies that trade less than 66 times earnings. Noted research firms have a buy rating on CRM.
Research in Motion Ltd (RIMM)
Shares of RIMM have had a tough year. The stock has declined by 63.29% for the year. The reason is that the company has performed below expectations despite conservative forecasts. It could not compete directly with Apple's (AAPL) phones and Google's (GOOG) Android phones. Smartphones have become really competitive and RIMM is having a hard time retaining users and attracting new ones. The company is counting on its new Blackberry Series 7 models to change this but the recent surveys imply forecasts may be optimistic.
The stock is statistically cheap at 4.37 times forward earnings and 1.12 times book value. In contrast, AAPL trades higher at 12 times next year’s earnings. Fellow laggard Nokia Corp. (NOK) is even valued higher at 14 times earnings. The company has strong balance sheet and has generated steady cash flows. This is something that will entice companies to acquire RIMM. The lack of specific strategy to compete with other smartphone makers may be an impediment to this acquisition. The majority of research firms are bearish on the stock. Its recent quarterly performance is a point of concern and could be a sneak peek of succeeding reporting quarters.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.