4 More Buyouts Waiting to Happen

The reeds give way to the wind
and give the wind away.
-- A.R. Ammons, "Small Song"

There always seem to be a few buyout deals in the air. Whether large or small, these corporate marriage proposals can lead investors to crazy returns on their invested capital, as the buyer almost always tacks on a very generous buyout premium. For example, I once got a 40% return in a scant three weeks by buying Reebok stock in 2005 -- just before adidas decided to buy the company.

Here are a few of the most obvious acquisition candidates in the tech sector today:

Company

EV/FCF

TTM Return on ROIC

CAPS Rating

CommVault Systems (NASDAQ:CVLT)

69.1

18%

*****

Soapstone Networks (NASDAQ:SOAP)

0.2

43%

**

Airvana (NASDAQ:AIRV)

4.1

137%

****

Gartner (NYSE:IT)

19.4

22%

**

Data taken from Capital IQ, a division of Standard & Poor's.
EV = enterprise value; FCF = free cash flow; TTM = trailing 12 months; ROIC = return on invested capital. Your decoder ring is in the mail.

Gartner is a household name in technology consulting and analysis, and I could see the company becoming a high-performing segment under IBM's (NYSE: IBM  ) big, blue umbrella. Gartner brings a very strong 22% return on capital at a very reasonable valuation, and it's still small enough to have room for organic growth.

As a bonus, the negotiations would be easy to facilitate, and there's no need to worry about relocation. The two headquarters are 30 minutes apart, coasting around eastern New York and western Connecticut.

The reeds give way to the wind
The other three names on my list might not sound as familiar, but their buyout potential is just as high.

CommVault deals in data protection and storage networks. Those are areas where Oracle (Nasdaq: ORCL  ) might like to grow stronger, and our Motley Fool CAPS players certainly have a lot of respect for the company.

Airvana is a specialist in mobile broadband installations, and Soapstone (until very recently known as Avici Systems) likes to help businesses deal with the patchwork of networking standards they end up with after many years of upgrades, emergency fixes, and business mergers.

Each of them might make a good fit with Cisco Systems (Nasdaq: CSCO  ) , and I could also imagine IBM stepping in to grab Soapstone, if IBM wanted to sell those network management solutions alongside its massive portfolio of network servers and business software.

If the last two companies look extremely affordable on an enterprise value basis, it's because they each come with generous cash accounts that would effectively lower any proposed purchase price by landing right in the buyer's vest pocket. Mind you, one way to look at a very low EV is that the actual business and its prospects add little value to any deal, which in turn could indicate a risky investment.

To counter that concern, let me point out that all the companies in that table generate positive free cash flow and extremely generous returns on capital, and they come with growth credentials in the decent-to-mindblowing range. The final judgment call is for you to make.

Foolish finale
I selected these prospective buyout targets because their products and services are popular with customers, judging by revenue growth, and because their operating metrics are very, very competitive.

Cisco, IBM, and Oracle all have deep pockets and well-known appetites for growth by acquisition, and they have real business reasons to open their checkbooks. That's why I believe in these matchups.

And if any of the industry giants do make moves on this list, their actions will teach us lessons about their business goals. The reeds give the wind away.

Further Foolishness:


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