Tech predators eye their prey in volatile times

Smart tech companies will look for mergers and acquisitions as stocks dip

While most eyes are still on stopping the bleeding on Wall Street, smart tech companies will take a page out of Warren Buffet's playbook by looking for merger and acquisition opportunities with stocks at multi-year lows.

The Nasdaq Composite Index, where most tech stocks trade, dropped 13% in the week ended 10 October. The Nasdaq was down 26% in the previous 30 days — and off 43% from a year ago.

That makes the downturn worse than Nasdaq's 36% fall during the crash of 1987, but not as bad as the 78% decline during the dot-com crash of 2000, Barron's blogger Eric Savitz notes .

Individual tech stocks, some of which trade on Nasdaq and others on the New York Stock Exchange, took a beating. Sun Microsystems, Yahoo and Nvidia fell 27%, 20% and 18%, respectively.

Despite the credit crunch, that could open up buying opportunities for cash-rich companies, said Oracle CEO Larry Ellison at his company's annual stockholders' meeting last week, according to The Wall Street Journal .

It also makes struggling firms that have hoarded cash more attractive, no-risk targets. For instance, Sun's market cap is just US$3.61 billion (NZ$5.80 billion), despite holding cash and short-term investments worth US$2.7 billion.

Here's a run-down of the potential prey in this new buyer's market.

Note: all stock prices and market cap figures are as of close of trading Friday, October 10. Financial figures come from Yahoo Finance, Morningstar.com and SeekingAlpha.com.

Prey

Sun Microsystems. Symbol: JAVA. Stock price: US$4.80. Off 52-week high: 81%. Price/earnings ratio: 9.8. Market capitalisation: US$3.61billion. Cash and short-term investments: US$2.7 billion Cash/market cap: 75% (the higher the better for an acquirer)

Though Sun has been profitable for the last four quarters, it remains a shadow of its glorious self during the dot-com era. Despite paying US$1 billion to buy open-source database vendor MySQL, Sun still has US$2.7 billion in cash, making it a no-brainer for the right buyer.

On the other hand, CEO Jonathan Schwartz has indicated his desire to turn the company around rather than sell. And with its cash-in-hand, it too could be a buyer. Sun has a chequered history, such as with its failed US$2 billion buy of Cobalt Networks.

Research In Motion. Symbol: RIMM. Stock price: $55.28. Off 52-week high: 63%. P/E ratio: 18. Market cap: US$31.3 billion. Cash and short-term investments: $1.38 billion. Cash/market cap: 4%.

One analyst, reported by Reuters, believes Microsoft has a "standing offer" to buy the BlackBerry handset maker for $50 a share. Canaccord Adams analyst Peter Misek said the deal would require RIM's stock to fall to $40 a share before such a Microsoft bid would seem attractive.

While sales of Microsoft Windows Mobile phones are increasing, sales of BlackBerry phones are absolutely strong. But Gartner analyst Philip Redman still doesn't think this is a good move.

"I don't see Microsoft moving more into the low-margin mobile hardware business right now," he said in an email. RIM declined to comment.

Also. if Microsoft was willing at one point to spend $48 billion on Yahoo , why not spend $31 billion just half a year later to get it? That's what one Yahoo investor — not Carl Icahn — is proposing.

Nvidia. Symbol: NVDA. Stock price: US$6.81. Off 52-week high: 83%. P/E ratio: 7.5. Market cap: $3.8 billion. Cash and short-term investments: $1.7 billion. Cash/market cap: 44%.

The graphics chipmaker has taken the steepest fall of any of the companies profiled here. As Barron's Savitz put it: "I know the company is troubled, but it now trades at under 1x revenue — or about 0.5x if you back out the cash."

VMware. Symbol: VMW. Stock price: US$21.03. Off 52-week high: 83%. P/E ratio: 34.6. Market cap: US$8.2 billion. Cash and short-term investments: US$1.5 billion. Cash/market cap: 18%.

Another high-flier that has fallen steeply this year, VMware, will start to see revenues and earnings put under pressure. Microsoft has begun earnestly pushing its cheaper-and-good-enough competing Hyper-V virtualisation technology, introduced in June.

Salesforce.com. Symbol: CRM. Stock price: US$32.56. Off 52-week high: 57%. P/E ratio: 121. Market cap: US$3.9 billion. Cash and short-term investments: US$580 million. Cash/market cap: 15%.

Like VMware, Salesforce.com enjoyed a lofty stock valuation based on it being the market leader in a small-but-growing space, software-as-a-service. Though its stock price has been sliced nearly in half, the company still trades at a P/E ratio of 121. That could put off some buyers. So might its relatively small cash reserve of US$580 million. It too faces competition from Microsoft, and even Google.

Top five predators

Microsoft is nicknamed "the Borg" for more than just its might in the market. Redmond also likes to buy and assimilate firms, both startups to get their technology and big firms to acquire market share. The latter was the reason why Microsoft almost spent $48 billion to get Yahoo. Having shown its willingness to spend that much money, anything in the low billion-dollar range must seem like a bargain.

In the past 3 1/2 years, Oracle has spent at least US$32 billion on acquisitions, turning itself into the vendor of a top-to-bottom enterprise software stack that is arguably broader in scope than any rival suite. Yet Ellison has hinted strongly that he isn't done. He says Oracle is now more interested in smaller, fast-growing startups rather than large public companies.

IBM, which this week reported a 20% jump in Q3 net income, is a quiet but happy shopper. Big Blue has already bought 12 firms this year, including business intelligence vendor, Cognos for US$5 billion. With nearly $10 billion in cash, expect IBM to continue its shopping spree.

Google's US$3.1 billion cash purchase of online advertising firm DoubleClick last year was an aberration. The online company has otherwise mostly bought startups to build out its portfolio. Like with its US$1.65 billion stock purchase of YouTube in 2006, Google likes to use its shares whenever possible. But he collapse of its stock price — down 56% from its peak a year ago — would seem to rule out stock-based transactions, for now.

HP has shown its willingness to make big buys for giant leaps in the marketplace. In May, HP bought It outsourcer EDS for US$13.9 billion and, lest we forget, its US$25 billion merger with Compaq Computer in 2002. With EDS, HP looks to cement its lead over IBM as the world's largest IT vendor by sales, a lead it established just two years ago. Look to HP to go bargainhunting.

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