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With market meltdown, which tech firms become predator or prey?

Smart companies will hunt for good merger and acquisition opportunities with stocks at multi-year lows. Here are the ones to watch.

Eric Lai (Computerworld (US))
13 October, 2008 08:39

While most eyes are still on stopping the bleed on Wall Street, smart tech companies will likely 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 percent last week. Nasdaq is down 26 percent in the last 30 days -- and off 43 percent from a year ago.

That makes the downturn worse than Nasdaq's 36 percent fall during the crash of 1987, but not as bad as the 78 percent 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 last week fell 27 percent, 20 percent and 18 percent, 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, reported 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, despite holding cash and short-term investments worth US$2.7 billion.

Here's a run-down of the potential prey and predators 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

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 AB Sun still has US$2.7 billion in cash, making it, from that standpoint alone, 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. As colleague Steven J. Vaughan-Nichols notes, Sun has a checkered history, such as with its failed US$2 billion buy of Cobalt Networks.

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One analyst, as 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 e-mail. RIM declined to comment.

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

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."

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

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.

Predators

Microsoft | Symbol: MSFT | Market cap: US$204B | Cash and short-term investments: US$23.7B

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 US$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.

Oracle | Symbol: ORCL | Market cap: US$84B | Cash and short-term investments: US$13B

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 hinted strongly on Friday that he wasn't done. "Acquisitions that we have been looking at for some time may now be more attractive," he told shareholders. But he said Oracle was now more interested in smaller, fast-growing startups rather than large public companies.

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IBM | Symbol: IBM | Market cap: US$121B | Cash and short-term investments: US$9.8B

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

Google | Symbol: GOOG | Market cap: US$103B | Cash and short-term investments: US$12.7B

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 percent from its peak a year ago -- would seem to rule out stock-based transactions, for now.

Hewlett-Packard | Symbol: HPQ | Market cap: US$94.3B | Cash and short-term investments: US$14.8B

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 and add to the six firms it has bought so far this year.

Apple | Symbol: AAPL | Market cap: US$78B | Cash and short-term investments: US$20.8B

Apple has reportedly bought ten firms in its 32-year history.

Apple's vertical business model guarantees that it never buys to gain market share, but only to acquire technology from startups such as processor designer PA Semi that it can easily digest.

On the other hand, if anyone can handle an acquisition right now, Steve Jobs' Apple could. Apple is very profitable. And it ranks just behind Microsoft in terms of cash-on-hand for a buyout.

Perhaps Jobs should reconsider the Apple-Sun merger that almost happened three times -- except this time, Apple would be the buyer, not Sun.

SAP | Symbol: SAP | Market cap: US$43B | Cash and short-term investments: US$3.2B

German enterprise software giant SAP also appears unlikely to be interested in the mergers and acquisitions game. Apart from last year's US$6.8 billion acquisition of Business Objects, SAP is best known for conservative, organic growth. It also has the least cash of any vendor on this list.

Matt Hamblen contributed to this story.