Technology

Are 2 Large Tech Stocks Looking For Big Takeover Targets?

The technology industry is one that tends to duplicate itself within the sector. If it appears to be working for one group, and most of all Wall Street seems to applaud, then it may very will work within another sector. In a research report from UBS they put forth proposition that after seeing $68 billion of deals in the semiconductor sector in just the first six months of 2015, that appetite for mergers and acquisitions could spread to the information technology hardware arena.

While there is always takeover chatter on Wall Street the fact of the matter is some of the companies that UBS examined may have hit an earnings growth wall, and may need to have a bolt on acquisition to renew growth. The UBS team took a look at deals that could make sense, and they also put forth a compelling reason why tech giants would want to make deals. The analysts expect some acceleration in IT Hardware consolidation given the overall lack of revenue growth, and the current customer demand for complete solutions from the giants.

Here are some of the possibilities that the UBS analysts feel could be workable deals. Again, they are speculating on what makes sense on paper, and there is a good possibility that none of these potential deals ever happen.

EMC Corporation (NYSE: EMC) is technology’s large scale storage leader, but new avenues of flash and other storage opportunities are grinding away at the tech giant’s business. The good news for the company is that storage demands are accelerating, and the company’s majority ownership of VMware Inc. (NYSE: VMW) gives them a virtualization infrastructure solutions product which includes a suite of products designed to deliver a software-defined data center (SDDC), run on industry-standard desktop computers and servers. While the VMware stock is on the balance sheet, the VMware earnings are not – and many investors have desired to see EMC unlock that value for years now.

The UBS team feels that the company may consider a merger with HP Enterprise, which is being created by the upcoming separation of silicon valley hardware icon Hewlett-Packard Company (NYSE: HPQ) and will be remade for the growing business of cloud computing, mobility and big data starting November 1st. This could add growth and revenues for both companies and create a monster entity in a very competitive landscape.

EMC shareholders are paid a 1.77% dividend. The Thomson/First Call consensus price target for the stock, which has had a lousy 2015 to date is $29.55. Shares closed Tuesday at $26.78.

Cisco Systems Inc. (NASDAQ: CSCO) needs storage, and for years the chatter all over Wall Street is which company would the networking giant consider taking a shot at. Some also think the company is also looking at cyber-security software as well, and FireEye, Inc. (NASDAQ: FEYE) was said to be under consideration back in the spring, a rumor that Cisco denied. Still, Cisco is now under a new CEO and he has already been redirecting the company.

The UBS team thinks that a very viable candidate for Cisco to look at would be Nimble Storage Inc. (NASDAQ: NMBL) which has developed a hybrid storage architecture engineered to seamlessly integrate flash and high-capacity drives. Nimble’s flash storage solutions enable the consolidation of all workloads and eliminate storage silos by providing enterprises with significant improvements in application performance and storage capacity.

While it wouldn’t be cheap, Nimble’s reasonable $2.14 billion market capitalization makes it a very workable deal even with a sizable premium for a company like Cisco that has a reported $54 billion in cash on the books. The huge cash hoard allows them to easily do an all-cash deal.

Cisco remains one of the 10 Stocks to Own for the Next Decade. Cisco investors are paid a nice 3% dividend. The consensus price target for the stock is $31.32. The stock closed Tuesday at $28.21.

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The UBS team is frank in saying that most investors do not think that mergers and acquisitions create value. They say the best way to judge a deal value instead of focusing on accretion in earnings-per-share, is to estimate if the present value of revenue and cost synergies exceeds the acquisition premium. This makes sense, because plain and simple, if the deal doesn’t ultimately pay for itself, it wasn’t worth it in the first place. The Wall Street graveyard is littered with the bones of many such deals.