Takeover activity in the technology sector already is hot, and analysts expect it to become even more torrid through the end of 2018. Across all industries, from the first quarter to the second quarter, the total value of offers in the U.S. rose from $312 billion to $405 billion, according to analysis by Morgan Stanley cited by Business Insider. A report by international accounting and consulting firm Deloitte indicates that tech acquisitions are now the top driver of overall M&A activity, according to ComputerWorldUK. The report indicates that the $250 billion mountain of cash held by Apple Inc. (AAPL) leaves that tech giant very well-positioned to become a major player in the acquisitions game.
That could add up to handsome profits for investors who buy shares in takeover candidates. With that in mind, Morgan Stanley has updated its own list of the most likely buyout targets in tech, which include Cypress Semiconductor Corp. (CY), First Solar Inc. (FSLR), Pure Storage Inc. (PSTG), LogMein Inc. (LOGM), Okta Inc. (OKTA), Etsy Inc. (ETSY) and HubSpot Inc. (HUBS).
7 Tech Takeover Targets
|Cypress Semiconductor Corp.||CY||$5.6 billion||Semiconductors|
|First Solar Inc.||FSLR||$5.5 billion||Solar cells|
|Pure Storage Inc.||PSTG||$5.5 billion||Data storage|
|LogMein Inc.||LOGM||$5.4 billion||Cloud-based applications|
|Okta Inc.||OKTA||$5.4 billion||Security software|
|Etsy Inc.||ETSY||$5.1 billion||E-commerce platform|
|HubSpot Inc.||HUBS||$4.8 billion||Cloud-based sales software|
Source: Morgan Stanley
Morgan Stanley's ALERT (Acquisition Likelihood Estimate Rankings Tool) model "screens for whether a stock will receive at least one tender offer for its entirety (not just a unit) in the coming year," using various quantitative factors, according to their July 26 report, "US M&A Activity: Mixed Signals in the Second Quarter." Large and liquid stocks in the top quintile of the ALERT rankings are deemed most likely to receive offers. The 7 tech stocks listed above fit those criteria. Since the debut of its ALERT system in the first quarter of 2013, Morgan Stanley indicates that 6.8% of the stocks passing its screens actually have been the targets of tender offers in the following 12 months. Cypress, Etsy and Pure Storage are representative cases discussed in more detail below.
Cypress: 'Sticky' Customer Base
Cypress already has been mentioned as a likely takeover target in a semiconductor industry that is consolidating, and in particular as a potential target for Broadcom Inc. (AVGO). Broadcom has a long-term strategy of growing through acquisitions, and the chipmaking industry as a whole has been achieving significant efficiency gains through M&A activity. (For more, see also: 9 Takeover Targets Broadcom May Pursue After Qualcomm.)
Cypress intends to become a major player in the so-called Internet of Things (IoT), which allows various devices to interact with each other over the internet, and the growing importance of this segment of information technology is bound to enhance its attractiveness as a buyout candidate, The Motley Fool reports. The same report indicates that, overall, Cypress is moving away from low-margin commodity products and towards higher-end chips whose buyers are "sticky" and focused on "quality, reliability, and longevity," per the company's CEO.
Etsy: Not Itsy Bitsy
Etsy runs an online sales platform, originally oriented towards low-volume sellers of one-of-a-kind craft items. As the company has grown, sellers of more mass-market merchandise have become an increasingly important part of its offerings, though it still touts itself as "the global marketplace for unique and creative goods." First quarter revenue was $120.9 million, up by 24.8% from the same period in 2017, per Etsy's earnings release.
Etsy serves 35 million active buyers, has more than 50 million listings and recently entered into a referral agreement with German-based DaWanda, a privately-held marketplace for gifts and handmade items with 2 million active buyers and about 4 million listings, per a company press release. As noted by Seeking Alpha, Etsy is regularly mentioned as an obvious takeover candidate by larger e-commerce players such as Amazon.com Inc. (AMZN), eBay Inc. (EBAY), Alibaba Group Holding Ltd. (BABA) or Walmart Inc. (WMT).
Pure Storage: The Flash
Pure Storage offers solid state storage (SSS) devices based on flash memory technology and which use semiconductor chips rather than magnetic tapes or magnetic disks. As described by Trintri.com, solid state storage is much faster, more reliable, and uses much less energy. Founded 9 years ago, Pure Storage now exceeds $1 billion in annual revenue, per The Next Platform, and counts about one-third of the Fortune 500 companies among its customers. Cisco Systems Inc. (CSCO), a leading provider of networking products and services, has been speculated as a potential buyer of Pure Storage, a move that would expand its own data storage product line.