Tech/Comm Acquisition Target Updates (CSCO, BRCD, NOVL, PGI, STX, WDC, XLK)

Mergers and Acquisitions are still coming in the world of technology and communications.  Many deals have been announced in technology that are around the Ciscoization of the data center and around cloud computing and software.   We wanted to review several technology and communications companies we have covered as potential M&A targets  in the recent past to discuss what the outlook is and what sort of progress has been made at each company.  You will notice the Cisco Systems, Inc. (NASDAQ: CSCO) theme throughout this potential tech M&A, but that is merely a sign of the times as tech giants like H-P, IBM, and Dell have gone after IT-management, cloud, storage, and networking operations.  We want to evaluate and update the outlook for Brocade Communications Systems, Inc. (NASDAQ: BRCD), Novell Inc. (NASDAQ: NOVL), Premiere Global Services, Inc. (NYSE: PGI), Seagate Technology PLC (NASDAQ: STX) and Western Digital Corp. (NYSE: WDC).  We also wanted to see how these compared to the Technology Select Sector SPDR (NYSE: XLK) as the tech/comms key ETF.

Brocade Communications Systems, Inc. (NASDAQ: BRCD) rose as an M&A potential target in late-Summer and shares have held their own despite the thought that many feel a merger here would have to come at too high of a premium for a buyer.  This was one of our picks for stocks which could double earlier this year before the cloud and M&A craze came, and the buyout thesis for a low-cost provider in networking and storage was a part of that call.

The company is effectively half Brocade in storage and half Foundry in communications and networking.  Shares were at $5.15 on our first go-round, now shares trade around $5.80.  The 52-week trading range is $4.64 to $9.45 and the market cap is roughly $2.6 billion.  Brocade is not meant to be an earnings report play as shares are often volatile around earnings.  The status of a deal is currently “possible, but nothing set on the books.”  Analysts also have an average price target of $6.35 for Brocade.

Novell Inc. (NASDAQ: NOVL) has been a long road of excitement that has so far led to nowhere.  The pending merger offer and pending auction or divesting plan has been on hold for about a month now,and frankly from the start we  expected that Novell would need a higher buyout price to secure shareholder approval.   There were reports that Novell was having a hard time selling its NetWare and identity management products because private equity firms would not pay Novell’s asking price.

When the first merger offer came, shares popped to $6.08 from $4.75 on over 140 million shares in a single day in March.  Shares have traded as high as around $6.50 but the stock is back to about $6.00.  Unfortunately, that is the long road to nowhere.  One key issue is that much of Novell’s cash is tied up internationally and cannot be easily accessed in a tax-efficient manner of repatriation.  The company had been a potential buyout candidate in the minds of many investors on several occasions over the last 10 to 15 years.  Here we are, Novell is small with a $2.1 billion market cap and it is still an independent company with over $1 billion in cash and equivalents if the cash can be tapped.

Premiere Global Services, Inc. (NYSE: PGI) is one we featured earlier in the year as “an easy bolt-on acquisition for any of the larger communications and behind-the-scenes IT players.” Much of its business has been mistakenly considered legacy communications when that is not the case any longer.  The company just last week announced the divestiture of its Xpedite Systems to EasyLink for $105 million in cash.  Premiere also last week reported third quarter revenues of $142.3 million (including $109.5 million from PGiMeet solutions), earnings from continuing operations of $0.06 EPS and non-GAAP earnings of $0.18 EPS.  Guidance was put at revenue from continuing operations of $107 to $109 million, and non-GAAP earnings of $0.09 to $0.11.  Shares were at $7.18 before earnings, fell to $6.72 after earnings, and are down to $6.35 now.  Shares were at $6.65 and had been down over 30% since the April peak when we covered it in July.

Now the company will effectively be a pure-play on conferencing and enterprise collaboration solutions.  The company is going to pay down debt and may repurchase stock along with investing in core communications technology.  This divestiture makes Premiere a potential stealth M&A target now that it is easier to analyze, and the company had long been overlooked because of its fax business. The $383 million market cap here could make for an easy integration for any of the larger communications providers that want to keep competing against Cisco.

Seagate Technology PLC (NASDAQ: STX) is one we covered among our dirt cheap value stocks in technology even before the rumors were flying high that the hard drive and storage device maker was considering going private (again).  Now shares are up significantly and the valuations are still dirt cheap with a current and forward P/E ratio of under 10.  Ditto for rival Western Digital Corp. (NYSE: WDC).  Both are attractive on valuations, although Western has a leaner balance sheet,

The difference between Seagate and the others mentioned here is that Seagate IS in talks to go private with a private equity firm.  Are flash-drives a threat ahead?  Sure, but imagining that neither of these storage leaders will play in the field seems unlikely even if they are not leaders there.  There is also a poor earnings trend with no guidance as you would expect from its low valuations.  The problem is that the cost of 1 terabyte of external storage is now under the $100 mark, and this is likely to at a minimum keep fears up that margins will decline.  Seagate traded nearly at $10 during the August lows and traded up to almost $13 in early October.  Now that the buyout talks have been confirmed, shares are now north of $15.00.  We have no updates on the merger as of yet, but we continue to see Seagate as likely bait.

Technology Select Sector SPDR (NYSE: XLK) has been on fire rising from under $21 at the end of August to above $24 currently.  Keep in mind that the top six components here account for roughly 45% of the entire ETF weighting.  The index ETF recently hit a 52-week high that is now technically a 2-year high and you have to go back to early-2008 to get higher share prices now.

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JON C. OGG