It happens every year, and 2016 won’t be any different. Larger companies looking to add to growth in addition to that of the organic or internal variety scan the field for purchases and acquisitions that are easy to bolt on and could add returns in a timely fashion. This year the process may even speed up some as the market sell-off that happened through the first two months may have already put some companies in the sights of acquirers, despite the recent market rally.
In what is a yearly and very all-encompassing report, the analysts at RBC again go through every sector looking for possible buyout candidates. Last year the company’s takeover screens yielded 29 candidates that were eventually acquired over the following 12 months.
One screen that should be of interest to many investors is the potential takeout candidates in the tech communication and networking sector. With demand for storage, streaming and data capability huge, and continuing to grow, major companies may be looking to add some of these top companies.
We found four that are very well known.
This stock has been a perennial takeover candidate for years. Brocade Communications Systems Inc. (NASDAQ: BRCD) provides storage area networking (SAN) and Internet protocol (IP) networking solutions for businesses and organizations worldwide. It operates through three segments: SAN Products, IP Networking Products and Global Services.
Brocade spent $144.5 million buying back its stock and ended the fiscal first quarter with a solid cash-to-debt ratio ($1.39 billion in cash and $798 million in debt), meaning there’s more than enough cash left on the balance sheet to fuel more buybacks despite operating expenses climbing 7% during the quarter.
Brocade trades at 5.2 times enterprise value (EV) to EBITDA and posts gross margins of 67%. These are the metrics that RBC uses when looking for potential takeover candidates. The company also boasts EBIT margins of 22%. The Thomson/First Call consensus price target for the stock is $10.33. The stock closed most recently close to that at $10.37.
This company has had a very up and down 52 weeks, but it could be an outstanding fit at a large cap leader. Ciena Corp. (NASDAQ: CIEN) leverages its deep expertise in packet and optical networking and distributed software automation to deliver solutions in alignment with its OPn architecture for next-generation networks. The company enables a high-scale, programmable infrastructure that can be controlled and adapted by network-level applications, and provide open interfaces to coordinate computing, storage and network resources in a unified, virtualized environment.
The company trades 8.9 times EV/EBITDA and posted gross margins of 41%. The EBIT margin stood at 5%. The consensus price target is $23.42, shares closed most recently at $17.28.
This stock has been on a roll recently, up 60% from lows printed last fall. Finisar Corp. (NASDAQ: FNSR) is a global technology leader for fiber optic subsystems and components that enable high-speed voice, video and data communications for telecommunications, networking, storage, wireless and cable TV applications. For more than 25 years, Finisar has provided critical optics technologies to system manufacturers to meet the increasing demands for network bandwidth and storage.
Finisar trades at 7.9 times EV/EBITDA, and it has gross margins of 28% and EBIT margins of 3%. The consensus price objective is $8.86. The stocks closed Wednesday at $16.67.
This is another top company that would be an outstanding addition to a networking giant. Infinera Corp. (NASDAQ: INFN) provides Intelligent Transport Networks, enabling carriers, cloud operators, governments and enterprises to scale network bandwidth, accelerate service innovation and simplify optical network operations. Infinera’s end-to-end packet-optical portfolio is designed for long-haul, subsea, data center interconnect and metro applications. Its unique large-scale photonic integrated circuits enable innovative optical networking solutions for the most demanding networks.
Infinera trades at 13.6 times EV/EBITDA, with gross margins set at 46% and EBIT margin at 8%. The consensus price objective is $22.23. Shares closed Wednesday at $15.98.
While there is no guarantee that any of these companies get purchased, they all stand out on their own merits. While only suitable for aggressive growth accounts, they make good sense as takeover candidates or standalone entities.