5 Buyout Targets That Could Produce Instant Profits

StreetAuthority Network

They call it "Merger Monday" for a reason.

Bankers like to spend the weekend putting the finishing touches on the paperwork, launching blockbuster deals in time for the start of the trading week. As this week began, we were greeted to Medtronic's (NYSE: MDT) planned $43 billion purchase of Covidien (NYSE: COV).

Big Pharma and medical device firms are surely seeking big prey these days, in part due to tax efficiencies created by trans-national mergers. (Covidien's Irish base is a plus for Medtronic.)

To be sure, the deal-making in the tech sector is heating up as well: the volume of deal-making is bigger than in pharma/medtech, but the size of the deals are smaller. Just last week, we heard about chip maker On Semiconductor's (Nasdaq: ONNN) buyout of Aptina Imaging and chip maker Analog Devices' (Nasdaq: ADI) planned buyout of Hittite Microwave (Nasdaq: HITT). And at the start of this week, memory chip maker Sandisk (Nasdaq: SNDK) announced plans to acquire flash storage provider Fusion-io (NYSE: FIO)

A buyout offer for Fusion-io had been expected for quite a while. Two weeks ago, I predicted that Seagate (STX) was a likely buyer. Indeed, there is a chance that a bidding war for Fusion-io will erupt. 

In my look at tech mergers and acquisitions (M&A) a few weeks ago, I also suggested that Splunk (Nasdaq: SPLK) and Pandora (NYSE: P) had potential buyout appeal. Yet the fact that both of those firms are worth more than $5 billion may make a deal more difficult to justify. Indeed, tech mergers generally seem to be in the $1 billion to $2.5 billion range these days.

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Still, I think Splunk has a great chance of attracting a bid -- if shares don't rally first for intrinsic value reasons. If Splunk's market value rebounds past $7 billion, a deal will be harder to justify. 

Here are four other tech stocks, all valued at less than $2.5 billion, that appear primed for a buyout offer. 

1. Rocket Fuel (Nasdaq: FUEL)​

This broken IPO slumped even further after I profiled it a month ago, but shares are now rallying again as buyout rumors start to spread. Rocket Fuel's focus on targeted digital advertising means that its customer base and technology platform would hold appeal to Twitter (NYSE: TWTR), Facebook (Nasdaq: FB), Google (Nasdaq: GOOG) and others. A current market value below $1 billion helps boost the buyout appeal. 

 

2. CommVault Systems (Nasdaq: CVLT)​

CommVault provides a suite of network management tools that organize and catalog system files with full back-up and restore capabilities. The company has built an asset that large tech firms crave: a hefty installed base of blue-chip customers that are signed to sticky long-term contracts. The fact that revenues have grown at least 15% for 10 straight years explains why CommVault has historically garnered a premium valuation: Shares approached $90 last autumn, but these days are stuck below $50. 

Blame goes to a sales execution stumble that led management to suggest that per share profits will be roughly flat this year before growing again in 2015. Still, the sharp drop in the stock coupled with still-bright outlook means that CommVault is now in play.

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3. Imperva (NYSE: IMPV)​

This is another provider of network management software (though mostly to data centers) that has fallen deeply out of favor with investors: Shares trade for $23, well below the 52-week high of $67. As is the case with CommVault, Imperva has experienced growing pains as its SalesForce expansion has been in need of tweaking. 

Analysts at Pacific Crest Securities said in a note to clients this week that "Imperva has taken steps to remedy sales execution issues and its technology portfolio remains unique." They see shares rebounding to $35, thanks in large part to still-growing concerns about network security issues.

Yet there are two reasons to think Imperva would make a logical buyout candidate. First, the company's market value is now around $600 million, meaning it could likely be bought for less than $1 billion.

Second, the company is starting to see increased competition from IBM (NYSE: IBM), and such threats from larger rivals often compel a small tech company to seek help from its own larger partner.​

 

4. Internap (Nasdaq: INAP)​

This operator of data centers has pulled back roughly 25% from its 52-week high, in part due to the fact that a key facility in Manhattan, New York, is being closed and not all customers at that site have chosen to migrate to Internap's nearby facility in northern New Jersey. As a result, analysts have trimmed their revenue growth forecasts for 2014 to around 18%, from a low 20s rate at the start of the year.

Still, this is a company with an impressive roster of clients, and despite the growth hiccup, analysts at D.A. Davidson think that "Internap is in the midst of a fundamental corporate transformation from an Internet service provider (ISP) to a cloud computing and data center service provider." That transformation is setting the stage for a solid rise in earnings before interest, taxes, depreciation, and amortization (EBITDA) margins, which leads to Davidson's $9 target price (representing 30% upside). 

More to the point, Internap's growing role in could computing, coupled with a market value of just $350 million, makes the company an appealing -- and readily digestible -- acquisition.

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Risks to Consider: If these companies stumble upon the release of second-quarter results, it may scare off potential buyers that don't want to inherit a company with messy sales force execution issues.

Action to Take --> All four of these companies have solid customer bases, and reasonable market values, putting them into the M&A spotlight. The key is to find these companies to be appealing on their own merits, either in terms of valuation, growth prospects or both. All three pass that litmus test, and the buyout scenario is just another positive factor in their favor.

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