Jefferies Identifies Top Tech Stock Leverage Buyout Candidates

Private equity firms have utilized the incredible market strength over the past couple of years to have initial public offerings on some of the deals that were put together before, and even during, the market meltdown that started in 2007. That fall, the S&P 500 peaked at 1,565 on October 9 and started a plunge that would trade to 666 intraday by March of 2009. The ability to cash out some of the large deals has provided many of the funds with the kind of liquidity required to make new leveraged buyouts (LBOs).

The fact that the top private equity firms are flush with cash is not lost on the analysts at Jefferies. They are on the hunt for potential LBO targets. In addition to raising cash by taking their old deals public, the strong market has helped strengthen inflows from institutional and high net worth investors looking to put money to work. Looking for stocks with high cash flow, low debt and solid business models has some interesting names showing up on the Jefferies screens. We highlight some of the large cap candidates.

Western Digital Corp. (NASDAQ: WDC) makes the Jefferies list. The company reported first-quarter 2014 non-GAAP earnings per share of $2.12, which beat the consensus estimate of $2.04. Western Digital’s market share in the total addressable hard disk drive (HDD) market increased from 44.9% in the previous quarter to 45.1%. Moreover, market share expanded from 44.9% reported in the year-ago quarter. One of its major competitors, Seagate Technology PLC (NYSE: STX), was taken private in 2000 in a huge $19 billion deal and returned as a solid IPO. The Thomson/First Call price target for the stock is $78. Western Digital closed Tuesday at $72.74. Investors are paid a 1.4% dividend.

F5 Networks Inc. (NASDAQ: FFIV) could be on private equity companies radar screens. The company gave earnings guidance below Wall Street views last Wednesday, but its fiscal fourth-quarter earnings and revenue beat views and the stock was traded higher. F5 Networks is the biggest supplier of application delivery controllers (ADCs), which optimize workloads among computer servers. Customers include financial service, telecom and tech companies. The consensus price target for the stock is posted at $100. F5 closed Tuesday at $84.16.

NetApp Inc. (NASDAQ: NTAP) is a large player in the enterprise storage business. The company supplies enterprise storage and data management software and hardware products and services. It offers FAS Storage Platform based on Data ONTAP, an operating system (OS) that supports storage area network (SAN) and network-attached storage (NAS) environments; storage efficiency technologies, such as FlexVol, FlexClone and Deduplication technologies; and storage management and application integration software comprising OnCommand management software that controls, automates and analyzes shared storage infrastructures. The consensus price target for the stock is $45. NetApp closed Tuesday at $39.76. Investors are paid a 1.5%.

Broadcom Corp. (NASDAQ: BRCM) earnings matched expectations, although some Wall Street firms were disappointed. Shares have declined close to 25% in the past six months as its guidance has failed to inspire confidence among investors on the past two earnings occasions. This seems surprising for a company that is deeply embedded into the mobile computing revolution and supplies chips to almost half of the world’s smartphones and tablets. The falling price and strong business model make it a solid target. The consensus price target for the stock is $31. Broadcom closed Tuesday at $27.66. Investors are paid a 1.7% dividend.

Citrix Systems Inc. (NASDAQ: CTXS) makes the list and is a top name to buy at many of the Wall Street firms we cover. The company lowered guidance significantly in early October and the stock got scorched almost 20%. The stock did rally back on earnings last week, and it may also be a prime takeout candidate. The company also announced that its board has authorized the repurchase of an additional $500 million of common stock. The consensus price target for the stock is $70. Citrix closed Tuesday at $57.21.

The analyst at Jefferies also listed Lam Research Corp. (NASDAQ: LRCX), Symantec Corp. (NASDAQ: SYMC), Analog Devices Inc. (NYSE: ADI) and Motorola Solutions Inc. (NYSE: MSI) as possible candidates. Even huge tech names like Microsoft Corp. (NASDAQ: MSFT), Cisco Systems Inc. (NASDAQ: CSCO) and Qualcomm Inc. (NASDAQ: QCOM) were on the Jefferies list of 100.

Just remember when it comes to those tech titans with $100 billion valuations and higher, the costs and debt required to do mega deals like that would be too mind-boggling to consider as real possibilities. In fact, it is these tech giants that may even compete against private equity for the likely buyout candidates. Being a strategic buyer with business synergies would even give these tech giants a leg up over private equity because they would not solely be financial buyers.

Let’s also not forget about Apple Inc. (NASDAQ: AAPL). It is a company that would be impossible to acquire because it is larger than half of the world’s countries now. With a cash arsenal of almost $150 billion, and much of that being overseas, Tim Cook might be able to pull a rabbit out of Apple’s hat with a big technology acquisition.

Clearly technology stocks are high on the radar, as their business models and low levels of debt are very attractive to private equity firms. In addition, technology companies in the right areas have years of innovation and growth in front of them. That may be just the ticket for savvy private equity firms with large amounts of cash to put to work.

Technology giants making deals are strategic buyers. Private equity acquirers are financial buyers, which throws them into the value investing camp.