5 Buyouts That Just Make Sense

The bidding war breaking out for storage specialist 3Par (NYSE: PAR  ) -- proving that sometimes a premium on top of a premium is justified -- is going to start lighting a fire in a few tech names that would logically look good on someone else's arm.

Investors scouring for buyout bait need to be careful, though.

Buying into a company solely for the chance of a meaty acquisition is a recipe for disappointment. The key to success is finding attractive stocks that are worth snapping up on their own right. If a suitor comes along with an offer too good to refuse, let it be an early exit strategy and a welcome bonus.

So who will be popped the question next -- but still a worthwhile buy if it decides to go the old maid route?

I have a few ideas.

Akamai (Nasdaq: AKAM  )
Shares of the content-delivery network popped 9% higher during the last two trading days of last week, fueled by a spike in options activity that led some to believe that Akamai is about to be swept off its feet.

It's easy to see why Akamai is attractive. It mans the server farm of choice when websites need speedy and secure delivery of pages, software updates, and chunky media files. This is a competitive sector -- and cutthroat pricing wars break out occasionally -- but this is still largely Akamai's playground.

The knocks against Akamai as a potential purchase are its already meaty price tag and dilutive valuation. Akamai's enterprise value is already weighing in just above $8 billion, and that's before we consider an agreeable premium. This naturally limits Akamai's buyer pool to a handful of tech giants. As fate would have it, they happen to be exactly the kind of companies that would benefit from being the web-serving partner of choice.

However, these blue chips trade at forward earnings multiples in the mid-teens or lower. Akamai is fetching nearly 30 times next year's projected profitability. In other words, the deal would be dilutive to earnings so the buyer will have to work hard to sell its shareholders on the reasons for making a splash in the content-delivery space.

Red Hat (NYSE: RHT  )
The Linux-based provider of enterprise software bucked yesterday's downtrend, closing higher on a smaller scale buyout rumor.

I can definitely see this happening. Red Hat is growing by offering companies a subscription-based suite of applications and tech support at cheaper price points than conventional corporate software. Building a profitable model on top of a freebie open-source platform isn't ironic -- it's brilliant!

Revenue grew at a healthy 20% clip in its latest quarter, and Red Hat's cash-rich balance sheet means that a company will have to shell out $800 million less than the ultimate buyout price.

Red Hat trades at an ever richer earnings multiple than Akamai, but the lofty valuation is simply a merit badge for proving that it's a perfectly capable growth stock on its own.

LivePerson (Nasdaq: LPSN  )
Computer makers, software developers, and even search engines are heeding the call to make a splash in business services, and LivePerson is a cheap date.

LivePerson's client list consists of blue chip telcos, software companies, and online retailers that lean on its live chat platform to provide cost-efficient, one-on-one, support to visitors. Why would a wireless carrier delay a client's response by funneling a user through email or toll-free support? Why would an e-tailer put up with abandoned shopping carts, when LivePerson can proactively lend a hand?

Unlike Akamai and Red Hat, LivePerson trades at a year-ahead earnings multiple in the teens.

Research In Motion (Nasdaq: RIMM  )
After predicting Palm's buyout earlier this year, it's time to begin approaching RIM as an acquisition target.

Folks have been burying the BlackBerry maker prematurely, figuring that it's going to fade slowly against iPhones and Android handsets.

It certainly doesn't smell like an elephant's graveyard from here. RIM shipped 11.2 million devices last quarter, and 24% growth in revenue is nothing to thumb your trunk at. RIM may be internally nervous about the longer term trends, so it may as well pursue an exit strategy if it's in the best interest of shareowners. It may as well do it now, rather than risk Palm's mistake of cashing out after it peaked. Microsoft (Nasdaq: MSFT  ) would certainly take a lot of pressure off of Windows Phone 7 with RIM in its arsenal.

Two years ago, at least one major analyst argued that Microsoft was likely to buy RIM if it ever broke below $50 a share. Two years later, RIM's there -- and with a much larger installed base of CrackBerry users to boot.

Netflix (Nasdaq: NFLX  )
For a company that has had its shares of volatile price swings over the years, the one constant is that buyout rumors never die.

Right now -- on top of the world -- Netflix can call its own exit strategy. It's the only company that has succeeded in digital video distribution on a grand scale, as most of its 15 million subscribers are taking advantage of its streams.

Netflix's success against tech darlings makes it a logical target for its vanquished yet cash rich rivals. However, it could also just as easily look smoking on the hand of a media giant or a web-savvy search engine.

Your turn! What buyout do you think will happen in the coming months? Share your matches in the comment box below.

Akamai Technologies and LivePerson are Motley Fool Rule Breakers selections. Netflix is a Motley Fool Stock Advisor pick. Motley Fool Options has recommended a diagonal call position on Microsoft, which is a Motley Fool Inside Value recommendation. Try any of our Foolish newsletter services, free for 30 days. Cupid's giving you a freebie!

Longtime Fool contributor Rick Munarriz checked his barometer. Yep, love is in the air. He does not own shares in any of the stocks in this story, except for Netflix. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.


Read/Post Comments (3) | Recommend This Article (13)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 24, 2010, at 4:26 PM, MAXwolf wrote:

    Rim has a perception issue along with a phone/operating system problem. The public has decided that the product is now lack luster and dated. That can be very difficult to turn around, even if you have the best gear, which I personally think they don't.

    Closely guarded, proprietary software was once king in many high tech areas, ask Nokia, who looks to have some of the same issues.

    I don't who would buy them now, they can wait a bit a pick them up cheaper. Stock has gone from approx 145 to mid 40's, any one out there holding on at a buck plus waiting for the turnaround?

  • Report this Comment On August 24, 2010, at 5:01 PM, andantewalker wrote:

    In IT market I can see only two potential targets for buyouts: Red Hat and Informatica.

    Red Hat would be the best fit for HP. Informatica could be attractive for Oracle and SAP.

  • Report this Comment On August 25, 2010, at 12:31 PM, MegaEurope wrote:

    Some acquisitions I can imagine:

    ClickSoftware (CKSW)

    Check Point Software (CHKP)

    Ebix (EBIX)

    STEC (STEC)

    Synaptics (SYNA)

    Artificial Life (ALIF)

    Marvell (MRVL)

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