Market Recovery: The Return of M&A in Tech and Telecom (ADCT, TEL, HPQ, ORCL, CIEN, Q, CTL, BRCD, CBB, CVLT, DELL, JDSU, LEAP, PCS, WFR, NOVL, PGI, RSH, TLAB, TDC, OVTI, SYNA)

The latest and M&A deal in the world of technology and communications came to ADC Telecommunications Inc. (NASDAQ: ADCT) this week, where Tyco Electronics, Ltd. (NYSE: TEL) is paying $12.75 per share in cash for a net price of roughly $1.25 billion.  After you have seen small and mid-sized deals come from Hewlett-Packard Co. (NYSE: HPQ) for 3Com and Palm, Oracle Corp. (NASDAQ: ORCL) for Sun and for Phase Forward, deals from Ciena Corp. (NASDAQ: CIEN) for Nortel’s metro ethernet operations, and even the proposed Qwest Communications International Inc. (NYSE: Q) merger with CenturyTel Inc. (NYSE: CTL), you have to wonder if more and more mergers are coming down the pipe now that the market has stabilized.  We wanted to consider some of the routine go-to stocks that keep coming up through time as technology, communications, and telecom merger candidates.

Some names under consideration that have either been rumored to be in deals or which could potentially be in future M&A deals are Brocade Communications Systems, Inc. (NASDAQ: BRCD), Cincinnati Bell Inc. (NYSE: CBB), CommVault Systems, Inc. (NASDAQ: CVLT), Dell Inc. (NASDAQ: DELL), JDS Uniphase Corporation (NASDAQ: JDSU), Leap Wireless International Inc. (NASDAQ: LEAP), MetroPCS Communications Inc. (NYSE: PCS), MEMC Electronic Materials Inc. (NYSE: WFR), Novell Inc. (NASDAQ: NOVL), Premiere Global Services, Inc. (NYSE: PGI), RadioShack Corp. (NYSE: RSH), Tellabs Inc. (NASDAQ: TLAB), Teradata Corporation (NYSE: TDC), OmniVision Technologies Inc. (NASDAQ: OVTI), and Synaptics Inc. (NASDAQ: SYNA).

For starters, most of the companies listed as targets here are possible bolt-on mergers rather than super-mergers.  Closing a mega-deal by the end of the year that has not been announced is going to be tough, and that likely means that the capital gains and the effects of the old Bush tax rates on capital gains will be either gone or muted in 2011.  Businesses today are willing to spend cash for companies that can be easily integrated or that open up new and untapped markets for them.  As far as a giant taking on another giant and then having to make divestitures and many layoffs, those deals are far less attractive for companies right now.  Then there is the notion of a tougher regulatory approval environment for large mergers that has to be considered.

The list of companies we have provided falls into at least two of three distinct categories.  The first category is that the company has been either a target or acquirer and a deal fell through.  The second category is that the company has either been rumored to be in a merger or it is a company that is one we have viewed as a shoe-in target for the right acquirer.  Lastly, there is the bolt-on deal or at a minimum a tool-box deal to make these easy for a buyer to gobble up.

We have compiled a list of predators and prey here for your review in the technology, telecom, and communications sectors.  This list is displayed alphabetically to avoid any ranking issues or any more pointed issues over size and the real chances of a deal coming into play.

One name which used to come up routinely is Brocade Communications Systems, Inc. (NASDAQ: BRCD).  This was one of our picks for stocks which could still double, and the buyout thesis for a low-cost provider in networking and storage was a part of why we thought the stock could double.  The short-term moves are not working in favor of holders, so it would seem no deal is imminent even if shares are at $5.15.

Cincinnati Bell Inc. (NYSE: CBB) is one of the last of the “anything remotely tied to the Bells” stocks, although it has always been its own boss.  It is the main telecom player for Cincinnati and its nearby areas located in Ohio, Indiana and Kentucky, making this a potential bolt-on acquisition for a larger telecom player.  It has almost the same exact operational area as its license back to the end of the 1800’s with a 25 mile radius around Cincinnati.  The small $615 million market cap would make this a line-item for a buyer, but it is worth noting that both AT&T and Verizon are going to have a harder and harder time under regulatory review in making acquisitions.  With shares at $3.06, the 52-week trading range is $2.50 to $3.74.

CommVault Systems, Inc. (NASDAQ: CVLT) is on sale due to its disappointing guidance this week.  The 21% drop to $18.50 would not likely make any lower-premium buyout more likely to be approved as the 52-week range is $15.60 to $24.51.  That recent high is an all-time high though and a Goldman Sachs strategist had this as a potential buyout candidate earlier this year.  Its Simpana platform aims to help enterprises manage data growth while cutting costs and adding security via cloud integration, deduplication, recovery, efficiency, virtualization, remote and branch office integration, and more.  Valuations are an issue, although the 21% drop leaves a market cap at just about $800 million.

As far as whether or not Dell Inc. (NASDAQ: DELL) can really go private, we have severe doubts about this that have not changed since Michael Dell hinted at the past thought.  PC companies are trying more and more to move to IT consulting and services, which only shows how the PC business has become no different from selling TVs, Radios, refrigerators, and toasters.  Taking Dell private would require an explosion of available capital in the private equity world that just does not seem possible.  The more likely scenario is the Dell keeps buying IT-services and peripheral operations that get it farther and farther away from being thought of as just being a PC-seller.

JDS Uniphase Corporation (NASDAQ: JDSU) was last rumored, or last ‘newly rumored,’ as an acquisition target in late-2009. With shares up at $10.75, its $2.35 billion market cap is still only a fraction of its former glory days during the dark fiber bubble in 2000.  As far as who that buyer would be, at what price a deal would have to even come at, and a few dozen other mysteries about any would-be deal here… we’ll steer far clear of trying to peg or isolate any odds on this one.  This company may just as easily, or maybe even more easily, be a potential acquirer of a smaller company if that opportunity arises.

Leap Wireless International Inc. (NASDAQ: LEAP) and MetroPCS Communications Inc. (NYSE: PCS) tried to tie the knot before, but the deal then yielded almost no takers and infighting came from it.  Share prices were much higher then, so a new deal is likely to face some of the same scrutiny.  The issue is that the overlaps here would allow for significant cost synergies and the merged company combining the #1 and #2 no-contract cellular carriers would be far more competitive against the pre-paid or no-contract sales of Sprint, AT&T, and others.  A merger here needs to be all-stock to allow upside for the long and wrong holders of each.  This would be a merger of need rather than a merger of greed.

MEMC Electronic Materials Inc. (NYSE: WFR) is another name which has come up as a would-be takeover target.  The problem is identifying it as a material takeover target for the solar sector or for the memory chip sector because of the silicon wafers.  This one also felt each time a rumor came out that it was a price-motivated bump as this one fell from north of $80 down to $10… At $10.65, almost half of its 523-week high of $20.93 might make this more than questionable.  It has also recently made a small acquisition of its own.

Novell Inc. (NASDAQ: NOVL) is one we have been surprised about how quiet the situation is in the quest for a higher price.  The proposed buyout almost steals the company when you consider its restricted or overseas cash.  Shares are at $6.15, well above the original Elliott offer of $5.75 per share in cash.  The deal on the table is not likely to be approved by holders, but a rival bid at a higher price might.

Premiere Global Services, Inc. (NYSE: PGI) is a company that would make an easy bolt-on acquisition for any of the larger communications and behind-the-scenes IT players out there.  Much of the business is mistakenly considered legacy communications when that is not the case any longer.  The robust conferencing solutions and enterprise collaboration operations here and the SaaS operations are met equally with dirt-cheap valuations on forward earnings estimates and cash flow expectations.  That makes this a potential stealth M&A target that has been largely ignored and overlooked.  With shares at $6.65 the stock is down over 30% since the peak before end of April slide.  The $400 million market cap would make this a simple integrate for just about any large company out there in the space.

What about the smaller companies that have survived selling all the little gadgets and components for your tech gadgets and PCs?  RadioShack Corp. (NYSE: RSH) is not a tech company, but is a retail destination for many who choose not to go much larger outlets like Best Buy or large box retail stores.  The company has been under a buyout rumor cloud for long enough that you wonder if it will ever really happen from Best Buy or from private equity.  After a big gain on Tuesday on hype and hope, followed by some easing of the buyout hype, the market cap is still rather low at $2.7 billion.  It had elevated options trading on Tuesday for a deal in the near-term rather than far away, and that is not likely tied to Lance Armstrong being out of the Tour de France on Team RadioShack.  It might take as much as $30 to secure a vote from holders, but who knows for sure on that… This is a long-standing rumor that has so far yielded nothing more than Julian Day getting to say the stock is up since he took over.

Tellabs Inc. (NASDAQ: TLAB) tried to merge with Ciena Corp. (NASDAQ: CIEN) back in the 1990’s.  That deal fell apart and the thought that the deal could ever be rekindled is one which has not come up in years.  But now that there has been the rumored pressure with the AT&T-Tellabs relationship risks due to vendor and supplier consolidation, Tellabs finds itself in a scenario that if shares get too weak then it may have to seek a buyer.  With a gain this week to $7.35 and a $2.8 billion market cap, the 52-week range is $5.06 to $9.45.  Tellabs may instead want to go on the offensive and look for deals where it could deploy its $1.4 billion listed in cash and short-term investments as a diversification away from just.  When it comes to Tellabs either making a purchase or looking for a buyer, the motivation might stem from need rather than greed.

Teradata Corporation (NYSE: TDC) has come up as a name in storage and enterprise data warehousing solutions as recently as May.  Shares are actually lower now than then, and at $31.40 its market cap is just shy of $5.25 billion.  This was a carve-out spin-off from NCR back in 2007 and the recent highs north of $34 are actually all-time highs.  Anyone wanting to acquire this one today for a premium would at least have the added higher shot of securing shareholder approval because the price would mean that every holder out there ever is profitable on the deal.  $5 billion may seem like less of a bolt-on deal here, but the company is expected to return to higher revenues.

There are two wild-card names which have routinely come up in the past as far as components for the trends of smartphones that could be bolt-on targets for an acquirer…. OmniVision Technologies Inc. (NASDAQ: OVTI) designs the chips for many of the cameras on your smartphones and Synaptics Inc. (NASDAQ: SYNA) designs the interface solutions that enable so much of the trends of touch-screen technology on many of the existing smartphones on the market.  OmniVision has a market cap of $1.15 billion and Synaptics has a $987 million market cap, but no deal has ever emerged on either despite speculation for owning patents and the technology behind the guts of features that make many of the popular smartphones so cool.

Regardless of today’s prices on many of these names, keep in mind that this is after a strong V-shaped market.  We had endless selling in June and then after the 4th of July we saw six straight days of gains for an 800 point move in the DJIA from trough to peak.  Now that the market has stabilized and with the tax rates likely to change after this year, it seems logical that increased M&A activity should be around the corner in technology, communications, and telecom.

As with all rumors, caveat emptor!

JON C. OGG