The big US companies with the weakest prospects have sold off by as much as 50% over the few months. But, because some of them have powerful brands, large customer bases, and reasonable long-term prospects, they are likely to be bought and bought cheap over the next two quarters. These are probably not companies which will be bought by financial investors. Most have a strategic value to one or more larger operations.
Sun Microsystems (JAVA) is in fourth place in global server share behind HP (HPQ), Dell (DELL), and IBM (IBM). Poor management execution has driven the company’s share price to near 52-week lows and revenue growth is only running 1% to 2%. Sun has a $13 billion market cap and over $2 billion in cash. A buyer could cut tens of millions of dollars in management, sales staff, and R&D costs. HP has a strong enough balance sheet to pay cash and widen its lead in global server sales. Sun’s shares have fallen over 40% during the last year.
Qwest (Q) is the premier landline and DSL provider in fourteen states. Its shares are weak because it does not have a cellular operation and may have to increase capital spending to build infrastructure to compete with cable. With a market cap under $10 billion, the company trades at .7x sales. Verizon (VZ) trades at 1.3x. If the larger phone company were to buy Qwest it could market its wireless services bundled with Qwest’s landline and DSL products. As Verizon’s FiOS efforts begin to get a return on investment,it could extend that build-out to Qwest’s service area. Qwest’s shares are off 50% over the last year.
Sprint (S) is still the nation’s third largest cellular operator with over 50 million subscribers. Its shares are down almost 70% in the last year and its market cap is below $25 billion. Korea’s SK Telecom has already made an offer to make a large investment in the company. Comcast (CMCSA) is losing ground to its telecom rivals partially because it cannot bundle wireless service with broadband and TV. Sprint still makes money and its national network could be a huge strategic asset.
Ford (F) management, the founding family, and shareholders need a way out. Ford’s shares trade below where they did when bankruptcy rumors troubled the company two years ago. The auto company still has over 15% of the US market and over $160 billion in sales. Ford’s market cap is just above $12 billion because of loses and high debt. Look for Carlos Ghosn to try to add Ford to his Nissan and Renault portfolio or for VW to make a run at Ford to get a large US beachhead.
Motorola (MOT) would be a real prize for No.2 global handset company Samsung. The Korean firm now sells about 40 million units a quarter to Motorola’s 35 million. Rival Nokia (NOK) is closer to shipping 100 million every 90 days. If Samsung does not come calling look for Sony Ericsson to make an offer. Its two parents have the capital to make a deal work. A buyer probably sells off MOT’s enterprise telecom business to make the overall cost of the acquisition less. Motorola’s shares are down about 40% over the last year and its market cap has dropped to $30 billion.
Circuit City (CC) shares have lost over 80% of their value over the last year and its market cap is barely more than $600 million. The company does have annual revenue of almost $12 billion and 600 stores. Best Buy (BBY), which has a market cap over over $18 billion could pick up CC for its revenue and locations, closing those that don’t perform well.
Harley-Davidson (HOG) has dropped from a 52-week high of $72.50 to $36.75. Annual sales are running over $6 billion and the company is nicely profitable. With a market cap under $9 billion, a big motorcycle operation like Harley would be attractive to another motorcycle builder like Honda (HMC). Production and product development savings would be substantial.
Jones Soda (JSDA) has dropped from a 52-week high of $32.60 to $6. The company had almost $12 million in sales in the last quarter. Its market cap is down to $156 million. The firm’s sales are still growing and it would make a nice niche by for Coca-Cola (KO) or Pepsi (PEP).
Yahoo! (YHOO) ends up on almost every M&A radar screen but now its stock is down to $20 and more than half the company’s value is in its stakes in Yahoo! Japan and Asia e-commerce company Alibaba. That means a buyer like Microsoft (MSFT) or News Corp (NWS) could buy Yahoo! for about $12 billion. That is less than 2x revenue for a company that makes money, has no debt, and could probably do without 20% of its staff.
Douglas A. McIntyre
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