8 Companies That Could Be the Next Big Technology Buyout

by: NakedValue

All of the headlines will focus on how Texas Instruments (NYSE:TXN) purchased National Semiconductor Corporation (NYSE:NSM) for $6.5 billion, a sizable premium from the previous market capitalization. But savvy investors should ignore the headlines and focus on the fact that National Semiconductor was an inexpensive stock before the announcement. In hindsight, most deals seem obvious, but it may have been more so in this case. Using valuations similar to what National Semiconductor was trading at prior to the announcement, we can put together a list of potential technology buyout candidates.

Before the Texas Instruments acquisition agreement, National Semiconductor was a $3.4 billion market capitalization company that traded with a forward P/E of 11.44, a PEG ratio of 1.43 and a trailing return on assets of 15%.

Here are a list of technology companies with similar valuations:

Forward P/E: 10.24; PEG Ratio: 0.85; ROA: 12.36%
SanDisk Corporation is an industry-leading maker and designer of NAND flash storage products. While they may be most synonymous with memory cards to the average consumer, their primary end markets are mobile phones, consumer electronics and computing. In 2010, around 65% of sales were from original equipment manufacturers and 35% were from retail.

They're not the cheapest name on this list, but they may be the most interesting because of their relationship with Apple Inc. (NASDAQ:AAPL). Flash memory amounts to around 10% of the iPad's cost. Acquiring a hardware manufacturer is a divergence from Apple's method of operation, but it could be advantageous to secure a market leading supplier of an integral component. This would not be the first time that SanDisk has attracted buyout attention. In late 2008, Samsung (OTC:SSNLF) offered to acquire SanDisk for $5.9 billion, but was rejected and eventually withdrew their offer.

Even without a bid from Apple, SanDisk remains interesting. Secular growth in smartphones and portable internet devices should continue and Eli Harari's retirement at the end of last year may make SanDisk a more willing target.

Forward P/E: 11.09; PEG Ratio: 0.69; ROA: 10.64%

RF Mirco Devices supplies radio frequency products primarily used in cell phones and other internet devices. In addition to overall weakness, the company's stock price has been hurt by a decline in both gross margins and operating margins during the most recent quarter, attributable to the loss of legacy products and a moderate decline in utilization rate.

The company provides unique risks and rewards. With it's largest customer, Nokia (NYSE:NOK), representing 55% of its revenues, RFMD will struggle as Nokia loses market share. But going forward, Nokia's partnership with Microsoft (NASDAQ:MSFT) to produce Windows 7 based phones could be a major benefit. RFMD is a leveraged way for investors to bet on the success of Nokia and the Microsoft based smartphones.

Forward P/E: 10.63; PEG Ratio: 1.05; ROA: 12.16%
David Tepper's Appaloosa Management owns this stock.

Forward P/E: 9.64; PEG Ratio: 0.96; ROA: 19.09%
The supplier of semiconductor processing equipment was an often mentioned buyout target until the financial crisis halted most acquisition chatter. In the year ending June 2010, the company generated $2.1 billion in sales. Less than 10% of the sales were from the U.S. Around 75% of sales came from Korea, Japan and Taiwan. LRCX is exposed to some customer concentration with the top three customers (Samsung, Taiwan Semiconductor (NYSE:TSM) and Toshiba (OTCPK:TOSBF)) representing 50% of sales. This global customer base is both a blessing and a curse. With around 15% of sales from Japan, the stock has come under pressure because of the earthquake and related setbacks.

There may be reasons for optimism, in the latest conference call Q&A, Steve Newberry predicted that upcoming NAND spending would likely exceed 2007 levels. Though if management actions are a clue, shareholders want to wait for a stock price decline before purchasing shares. The company purchased more than $200 million of its own shares in early 2010, but stopped during the recent quarter because of strong stock performance.

David Tepper's Appaloosa Management owns this stock.

Forward P/E: 11.52; PEG Ratio: 0.79; ROA: 18.06%

Forward P/E: 8.62; PEG Ratio: 0.66; ROA: 17.09%
David Tepper's Appaloosa Management owns this stock.

Forward P/E: 9.82; PEG Ratio: 0.75; ROA: 11.10%

Forward P/E: 10.71; PEG Ratio: 1.15; ROA: 10.03%

The technology sector contains many great companies trading at reasonable valuations. The semiconductor industry has been particularly depressed. Based on the industry's low valuations and the substantial premium that Texas Instruments paid for National Semiconductor, investors should take a closer look at our technology buyout candidates.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in LRCX, AAPL, KLAC, TER, MSFT over the next 72 hours.

Additional disclosure: NakedValue.com does not receive compensation to write about any specific stock, sector or theme.