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Cramer's Top 10 Takeover Candidates

Jim Cramer

On my "Mad Money" TV show Tuesday night, I featured a segment in which I explained to viewers how to identify potential takeover targets. (To read the entire recap of the show, click here.)

Each of the technology names on this list is a profitable company that represents a good takeover target. Their shares could be bought with acquisitions in mind.

To come up with this list, my research team and I looked at stocks that have taken a beating in the market lately -- for instance, those that got hammered due to the backlash from the options-backdating scandal.

Remember, it's important to do your homework before diving into a stock. Here are the 10 stocks I believe could benefit from potential takeovers, and the reasoning behind each.

Broadcom(BRCM)

This company is hated. It's getting killed on the options backdating scandal and its guidance was also not so hot. It has trailing 12-month (TTM) free cash flow of $478 million, and its free-cash-flow yield of 4.6% is high for a semiconductor company. Broadcom's shares trade at 14 times trailing 12-month EBITDA, which is not terribly cheap but many high-growth tech stocks are trading over 20 times EBITDA.

Possible partners: Texas Instruments, Intel

Western Digital(WDC)

Working in this hard-drive maker's favor is the fact that Seagate Technology's(STX) purchase of Maxtor(MXO) is likely to boost pricing in the industry, and we will see huge growth in hard drives in coming years, despite the entrance of flash.

The shift of the PC into an entertainment center is a major driver of hard-disk business, plus TVs are getting hard drives, video-game consoles are getting big hard drives, and then there are TiVos too -- this is huge business. This stock is trading at just 6.4 times EBITDA, with an enterprise value (EV) of $3.2 billion.

Its most probable suitors are private equity/LBO firms because the Department of Justice might come down on Seagate if it tried to take it down. Palm(PALM)

This company's has big exposure to the smartphone market, and it's partnered with Microsoft(MSFT) and Vodafone(VOD) to promote the Treo in Europe. Palm is trading at just seven times EBITDA, with a $1.6 billion market cap.

Possible partners: Hewlett-Packard, Dell, private equity/LBO firms

ActiveIdentity(ACTI)

A very-poor man's RSA Security(RSAS), but we know that Symantec(SYMC) was in the bidding war for RSA, so it could be looking for a consolation prize. The stock has a $206 million market cap, but $140 million in cash with a cash burn of about $20 million a year. Its EV/sales is 1.5 times.

Possible partner: Symantec

Wind River Systems(WIND)

One of the 15 tech stocks down most so far this year (-45%) and trading at 18 times EV/EBITDA. The company offers evice software optimization solutions to enterprises that are used to optimize the functionality of digital imaging products, automobile braking systems, Internet routers, avionics control panels, and factory automation equipment.

BEA Systems(BEAS)

Tibco(TIBX)

These two software companies are the most likely software companies to get taken out next. Citigroup says there is a "middleware" gap, that's what these two companies make.

BEA trades at 3.8x sales and 14.9x EV/EBITDA. Tibco trades at 4.4x sales and 16.2x EV/EBITDA.

Their possible partners: HPQ, SAP, Oracle

Rounding out the list of 10, are:

• Websense(WBSN), one of the 15 tech stocks down the most this year (-43%)
• FileNet(FILE), another company Citigroup says will fill a content management gap
• Avid Technology(AVID), down 38% for the year.

Please note that due to factors including low market capitalization and/or insufficient public float, we consider ActiveIdentity to be a small-cap stock. You should be aware that such stocks are subject to more risk than stocks of larger companies, including greater volatility, lower liquidity and less publicly available information, and that postings such as this one can have an effect on their stock prices.

At the time of publication, Cramer had no positions in stocks mentioned.