"They've got a hefty cash position that comes along with a transaction," Sutton says. The company last reported cash on hand of about $98 million.

Napster did narrow its losses more than Wall Street expected in its latest quarter, but it also guided lower for the current period and reported a 7% sequential decline in its subscriber base due to the introduction of its free Napster.com site.

However, the company said design changes to the page should prompt new paid subscriptions in the second half of the year.

Additionally, Napster's has a total paid subscriber base of 512,000, including 4,000 university subscribers, as of June 30, 2006. Excluding college subscriptions, which slow in the summer, paid subscribers grew 26% year over year in the June quarter.

Gene Munster, a senior research analyst with Piper Jaffray, says that companies in three different areas are likely Napster shoppers.

"The most logical is service providers, because music on phones is an emerging trend, and the service providers are trying to get up to speed quickly," says Munster, who has an outperform rating on the stock and whose firm makes a market in Napster.

Just last month, Nokia ( NOK) picked up Loudeye ( LOUD), giving the company the ability to sell music downloads to its customers, and Napster enjoyed a surge in its price on the news.

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