Two Tech Stocks That May Be Courted

Includes: FTNT, TTGT
by: The Illogical Investor

It would seem that the mergers and acquisitions field is once again in vogue and deals are plentiful. Of the stocks I have previously discussed: Western Coal (OTC:WTNCF) has accepted an offer from Walter Industries at a 56% premium to the previous day close, Riversdale Mining (OTC:RFLMF) revealed that discussions have taken place with Rio Tinto (NYSE:RIO) about a possible sale of the company and recent call option activity in Temple Inland (NYSE:TIN) seem to indicate that bets are being placed on the sale of the company.

I see future deals coming down the pipe, and not at a trickle, but rather as a flood. Despite the grim economic news many companies are flush with cash, as they have been busy slashing costs since 2008. Now, employees are being asked to do more for the same or even less cash remuneration and they are doing so rather than risk losing their jobs in the current environment.

The question company CFOs are faced with is, what to do with their cash?

To further complicate matters, the US Fed's ultra low interest policy has limited the opportunities where cash can be parked while earning a reasonable return.

Dividend payments are an option, but wary CFOs may be reluctant to do so. Once a dividend is increased, it will need to be maintained in order to appease the market. One off special dividends are great for current investors, but do little to attract future investors. Certain sectors such as tech do not historically pay dividends, after all, these are the sexy high growth stocks.

Of course, the company can buy its stock back if they believe it to be undervalued, but this can be an one off adrenaline shot. Even companies that announce buy backs over a period of time quickly find these schemes built into share prices and expectations.

All the above means that the field is ripe for acquisition hungry companies to make deals, and as we have seen there are many CEO junkies out there.

The trick now is to identify those companies that are potential targets and those that are acquirers. The commodity space is particularly rich in M&A opportunity currently, but for this post, I will highlight two technology companies that I feel wouldn't have smoke if there were no fire.

The first company is Fortinet Inc (NASDAQ:FTNT), a leading network security provider. The company has an excellent management team that has been delivering growth on a consistent basis, culminating in an outstanding third quarter and beating the street's estimates on revenue and growth comfortably.

This well run company is also in a sector that has seen high profile deals by Intel (NASDAQ:INTC) and HP (NYSE:HPQ), so it is not surprising to read in the press of potential suitors such as IBM being touted for Fortinet.

The second company worth reviewing is Tech Target (NASDAQ:TTGT), an online advertiser.

The company recently announced a tender offer to buy back shares at $6, a 15% premium to the previous closing price, indicating that management believes the shares to be undervalued. They did miss third quarter expectations, but also raised guidance for the fourth quarter.

The company operates in a sector which has cash rich mammoths such as Google (NASDAQ:GOOG), Yahoo (YHOO) and Microsoft (NASDAQ:MSFT) as potential suitors. The sector is also one in which venture capital has historically been active, and I see no reason that this historic trend will not be continued.

Disclosure: I am Long FTNT, TTGT.