5 Technology Deals That May Need to Die (Update 1)

Juniper, NetApp, Brocade and HP slides updated to reflect added data, Monday stock prices and analyst comments

NEW YORK ( TheStreet) -- Technology M&A has surged in the last twelve months, even as many of the largest rumored deals failed to catch a bid, signaling that those trying to profit off of merger activity have to check their thinking.

Oracle ( ORCL), Intel ( INTC) and IBM ( IBM) played a key role in driving the M&A market in the last year, but rumored mega deals never materialized. The gap in expected deals and actual mergers is a sign of wider disconnect in what investors may see as cheap companies and what C-suite executives see as ones that can offer innovation and drive profitability.

As tech titans like IBM, Apple ( AAPL) and Google ( GOOG) drive near or past record highs, competitors like Yahoo! ( YHOO), Hewlett Packard ( HPQ), Research In Motion ( RIMM) spent 2011 at or near post-crisis lows. In a past age, such valuation gaps would have paved the way for an all-stock mega merger boom embodied by HP's $25 billion acquisition of Compaq in 2001.

For tech giants that have found hard luck and falling shares, it may be time to question whether lower prospective takeover prices justify a recent flurry of deal rumors. With declining market shares or waning earnings, struggling tech companies may not look as attractive as many would expect, regardless of how far their stocks fall. A look at recent large deals shows tech acquirers are more interested in buying even premium priced growth opportunities over opportunistic value plays.

In the second half of 2011 and early 2012, the industry's most deal hungry minds spent their precious cash to buy premium-priced, high growth companies like SuccessFactors ( SFSF), DemandTec ( DMAN) and RightNow Technologies ( RNOW).

Overall, premiums in U.S. Technology M&A deals increased to 32.6% on $60.6 billion of deals in the last 12 months, according to Bloomberg data, a lift from $46.9 billion of tech deals cut at a 21.6% premium a year prior. That's a larger gain than the 14% boost to the Technology Sector SPDR ( XLK), as a 2012 tech rally has pushed the sector to a 20% index weighting in the S&P 500.

The conflict between what is and what looks like a takeover candidate has to do a lot with the companies looking to make acquisitions. Industry heavyweights in IT services, mobile hardware and Web advertising have strong cash generating abilities and presence in their respective markets. In a deal, companies like Oracle, "are trying to plug the holes that they have and foresee in the future," says Sachin Shah, a special situations analyst with Tullet Prebon.

For instance, Intel was the most active acquirer in the last 12 months, cutting 23 separate deals according to Bloomberg data. But the world's largest chip maker disappointed investors hoping it would cut a mega-deal like going after NVIDIA ( NVDA). The company spent $26.3 million on average in its deals, putting its total at just $605 million.

Whether it's business service companies like IBM and Oracle or consumer-oriented names like Google and Apple, tech leaders are looking at M&A as a way to add an innovation or service to make their existing businesses worth more.

"They can't risk missing some opportunity because they have to offer more and more service for every client dollar," says Shah. "If you have to provide more services every day, why would you acquire a peer when all you get are cost synergies."

Here's a look at five long-held deal rumors that need to be rethought based on their strategic fit with the needs of larger players.

>>To see these stocks in action, visit the 5 Deal-Ready Stocks Loved by Hedge Funds portfolio on Stockpickr.

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5. Juniper Networks

A long rumored large-cap deal play, Juniper Networks ( JNPR) may be a more likely acquirer than a takeover target, as information technology companies look to profit from virtualized servers, switches, routers, storage and security hardware.

Juniper is second to Cisco ( CSCO) in the networking-equipment industry, where it earns more than 60% of its revenue from phone, cable companies and Internet service providers. While the shares are off nearly 50% in the past year, the company may still be too big and offer too little value for a large acquirer. In January, Juniper posted a fourth-quarter profit that fell 49% from year-ago levels on weak router sales and it forecast a continued drop in the first quarter of 2012.

Juniper shares are up nearly 5% year-to date, underperforming the S&P 500 as the company tries to recover from a 2011 stock swoon that put its shares near post-crisis lows.

As far back as March 2009, UBS analysts noted that Oracle or Cisco could make a move for Juniper Networks among a range of 16 M&A targets for the two firms that included McAfee, Salesforce.com ( CRM), TIBCO Software ( TIBX) and VMware ( VMW).

Oracle has since cut large deals buying Sun Microsystems in 2010 for over $7 billion. In the last year, Larry Ellison set his sights on catching up in cloud-based services paying $1.5 billion and $1.9 billion for cloud business software companies RightNow and Taleo. Cisco cut its own deal earlier in February, when it bought optical network company Lightwire for $271 million.

In an April 2010 article Bloomberg noted bankers and analysts who said that a Juniper-sized acquisition by IBM could add up to $3 billion in sales to "Big Blue" and plug a hole in its product offerings, especially in its cloud services and virtualization businesses.

But in its 2015 roadmap, IBM is looking to spend just $20 billion on M&A to grow revenues by $2 billion as it returns roughly $50 billion in capital to shareholders via stock repurchases.

So far, deals like its DemandTec and Algorithmics acquisitions and previous buys of Sterling Commerce, Netezza and Unica are midsized acquisitions targeted at the company's cloud, analytics and smarter planet initiatives. At a market cap of $12 billion and with a hardware bent, a Juniper deal would be IBM's largest deal since successfully transitioning to an IT services powerhouse. It makes Juniper likely beyond IBM's deal appetite.

A bigger question may be whether Juniper Networks will double down on its networking virtualization business with a potential deal for Riverbed Technology ( RVBD), Acme Packet ( APKT) or Fortinet ( FTNT), among other players, after a late-2011 $1 billion private equity buyout of networking specialist Bluecoat Systems.

In November, Juniper senior vice president Mark Burrows indicated that the company would look to make further software acquisitions to round out its networking strategy. "You've certainly seen M&A activity in the software business and we'll certainly look for good opportunities in the future," said Burrows at a Morgan Stanley event, according to Bloomberg.

While continued acquisitions by Juniper may prove timely in the long-term, they would likely disappoint some investors who may be hoping for a large deal in 2012.

Analysts polled by Bloomberg have a 12-month median price target of $22.43 for Juniper, just higher than Monday's trading prices of $21.41. Earlier in March, Barclays Capital analyst James Kvaal upped his price target for Juniper to $26 a share from $24. The company is expected to see its revenue grow 1% to $4.5 billion, while profits are expected to drop nearly 25% to $341 million in 2012, according to consensus estimates.

In recently quarterly filings Capital World sold 8 million Juniper shares, completing its liquidation of the company's stock after once being a big holder. Juniper's largest shareholder T. Rowe Price added to its position, putting it at nearly 14% or $1.57 billion, while Goldman Sachs upped its stake by roughly a third, as the company's largest buyer in the most recent quarter ended in December.

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4. NetApp

A 18% decliner in the last 12 months, even after a near 20% surge in 2012, NetApp ( NTAP) may not have many able or willing buyers, even as speculation for a deal persists.

The company, which sells hardware to store data for manufacturers, resellers and business partners has benefited from stronger than expected third-quarter earnings announced on Feb. 16 with its performance bolstered by an increase in both customers and shipments.

Still, the company is so large that it's limited to acquirers the size of IBM, Dell, Oracle and HP, which all may have an aversion to NetApp for a host of reasons. The company's market cap stands at over $15 billion, making a prospective deal significantly larger than anything cut in 2011.

There are hitches with almost every potential acquirer with the cash or financial strength to take NetApp on. Cisco, EMC ( EMC) and VMWare ( VMW) are partners on a server, storage and virtualization venture, making a potential deal fraught with challenges. In May 2011, a Cisco and NetApp partnership called FlexPod began showing promising orders, further complicating an acquisition.

After taking on Autonomy, Hewlett Packard's new Chief Executive Meg Whitman said in late 2011 that the company will be staying on the sidelines as it sorts out what to do with the businesses it already owns.

For NetApp, the best bet of an acquirer seems to be Dell, which is diversifying its personal computer's business into supplying data center equipment and software. A lot may be tied how consumers react to the launch of Microsoft's Windows 8 rollout later in 2012. After losing out to HP on its $2.35 billion acquisition of 3PAR, would Dell be willing to bet the farm on networking? After all, Chairman Michael Dell has said that aside from the company's new diversification focus and the promise of Windows 8, Dell will benefit from a distracted HP.

Meanwhile, some are looking for NetApp to make acquisitions and boost its product offerings in data analytics and security. In a Nov. 17 note, Brian Marshall of ISI Group wrote that with its near $5 billion in cash, the company should look at deals as bold as a Salesforce.com, Informatica ( INFA) or Tibix ( TIBX) acquisition within software and IT services, or Brocade ( BRCD) in the enterprise storage space.

Also in November, a Bloomberg article pointed to CommVault ( CVLT) and Quantum ( QTM) as possible NetApp acquisitions, which may help the company keep pace with competitor EMC.

While NetApp's revenue is expected to grow to $6.2 billion in 2012, its profit is expected to fall 11% to $597 million, according to consensus estimates polled by Bloomberg.

Fourteen out of the company's top fifteen shareholders added to their NetApp holdings in the most recent quarter, according to filings with the Securities and Exchange Comission, including Goldman Sachs and Vanguard, who boosted their stakes above 4% as the top NetApp holders.

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3. InterDigital

InterDigital's ( IDCC) decision to move away for plans to pursue a multi-billion dollar sale of its patent portfolio likely put to rest the heated deal speculation that drove trading in the company's shares over the past year.

The designer of hardware and network technology for mobile devices like cellphones and smartphones finished an exploration process for the sale in January and saw its shares plummet in the wake of the news. The move followed Eastman Kodak's filing for bankruptcy protection after it was unable to draw in funds via patent sales.

In July, InterDigital shares had surged after it hired Evercore Partners and Barclays Capital to advise on its "strategic alternatives," such as a sale of the company or its patents amid increasing demand for wireless patents.

Names that were attached to possible bids in the months that followed included Qualcomm ( QCOM), Nokia ( NOK), Intel, Samsung and Ericsson. In November, UBS analysts even highlighted InterDigital as a prospective leveraged buyout candidate for a private equity firm.

The optimism about a deal got an extra jolt after Google paid a hefty premium in its $12.5 billion acquisition of Motorola Mobility ( MMI), making the deal mainly to snag intellectual property rights, not the company's actual business.

Both InterDigital and Kodak may have been unable to fetch the prices they were seeking because their patents are encumbered by years of licensing agreements, making them harder to sell. Heavily licensed patents are difficult to value because buyers would need to see how far partnerships travel and if infringement claims are already protected by previous settlements.

InterDigital shares are down 13% in 2012, and more than 18% in the last 12 months. Without M&A speculation injected in the stock price, InterDigital is less speculative but also more boring.

The company trades at an earnings multiple that discounts the 30% jump in earnings to $2.40 a share that the analysts expect in 2012. On an enterprise value to 2012 revenues basis, the company's peer group is trading at 5X 2012 consensus revenue estimates, compared to 3.5X for InterDigital. The company gets a price target of $45.67 a share from analysts polled by Bloomberg, a near 20% boost from current prices.

The current valuation may show that InterDigital, could benefit patient investors compared to those who were looking to profit from a would-be takeout, according to Christopher Versace of RealMoney. Esepcially if 3G and 4G LTE smartphones continue to be adopted by consumers.

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2. Brocade Communications

Since putting the company up for sale in 2009, Brocade has long been rumored as a takeover target for a private equity firm or strategic acquirer like NetApp, Dell, HP or Oracle, among a host of tech players. Quatalyst Partners tech banker Frank Quattrone has reportedly been shopping the maker of switches for data-storage networks for years, but it increasingly looks like Brocade will have to go at it independently in the nearterm.

In recent weeks shareholding data and reports from Bloomberg and DealReporter signal that prospective buyers are vacating Brocade as an acquisition target. Because prospective private equity buyers like the Blackstone were reported to walk away from the bid because the market cap had swelled above $2.5 billion.

After news of a deal breakup came in late February, FBN Securities analyst Shebly Seyrafi nevertheless raised his price target for Brocade shares to $6.50 from $5.50 on the company's first quarter earings and second quarter outlook, noting ethernet sales and the benefits of an over 50% debt reduction. "A smaller M&A premium is therefore indicated for Brocade ," wrote Seyrafi of his raised price target.

Meanwhile, Elliott Management sold over 9 million Brocade shares between Nov. 3 and Jan. 12, according to filings with the Securities and Exchange Commission, essentially removing that firm as a potential acquirer.

Prior to private equity takeover reports, long-rumored strategic acquirers of Brocade like Dell and IBM fell by the wayside as they cut other deals in the networking space in 2011. Nevertheless, in the most recent quarterly filings, some hedge funds piled into Brocade's stock in the fourth quarter, a sign there may still be a whiff of speculation left.

Highbridge Capital Management bought over 2.3 million Brocade shares, while Millennium Management and Two Sigma Investments build 1 million share-plus sized stakes in the quarter. Meanwhile, Caxton Associates, Delaware Management and Pyramis Global added roughly 1 million shares to their holdings. For Highbridge, Brocade is now the funds third largest holding, according to its latest filing.

Brocade's shares have risen nearly 10% in 2012, adding to a fourth-quarter gain of more than 25% as earnings recovered and sale speculation intensified. Nevertheless, Brocade's shares are still off 12% in the last 12 months.

In 2011, Brocade saw its profits fall by over 50% to just over $50 million, while revenue grew over 5% to $2.1 billion. In its most recent quarter ended in January, Brocade posted a $58.6 million profit though.

Brocade is expected to record $2.2 billion in sales and $87.9 million in profit in 2012, according to consensus estimates of analysts polled by Bloomberg, who give the company's shares a price target of $6.61. Currently, 6 analyst rate Brocade's stock a "buy," while 22 rate it a "hold" and 3 give it a "sell."

Other large Brocade shareholders include Franklin Resources, Fidelityand Vanguard, each with over 5% stakes in the company's shares.

For more on Brocade, see stocks under $10 setting up to trade higher .

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1. HP

Could this Dow component be a takeover candidate?

It's a crazy notion that now seems like a remote possibility. Investors should not focus on the company's battered shares and relatively strong trailing sales, cash flow and profits as a catalyst for M&A that would lift shares though. Instead, they need to watch for signs that new CEO Meg Whitman is going to steer HP toward a business model that will be competitive in Silicon Valley in the long-term.

Much ink has been spilled about the deal making at HP over the last two years. Two CEOs ago, the company looked like one of tech's serial post-crisis acquirers, buying 3Com, Palm, Arcsight and winning out against Dell in a heated battle for 3PAR. In August 2011, then-CEO Leo Apotheker made a giant wave when he announced the acquisition of British software giant Autonomy for $10.3 billion and planned a spin of the company's world-leading personal computer business.

Whitman quashed the PC spin-off plans shortly after Apotheker's firing, and she is now focusing on leveraging Autonomy and identifying a durable strategy to combat falling PC profit margins amid the competitive threat posed by the mobile smartphone and tablet world.

HP won't be doing much M&A anytime soon, Whitman has said, and if asked, she'd likely say they aren't looking at a sale either.

Nevertheless, at a $50 billion market cap, which fell as low as $35 billion in 2011, speculation of potential buying interest from Oracle made it to the pages of the New York Post back in August 2011, especially as the company was toying with the PC business spin-off. It even gave fodder for analysts to speculate on a deal that once would have seemed unthinkable but there hasn't been much noise since then.

Maybe one day a deal will emerge. In the meantime, HP is facing a year of intense investor scrutiny and a high bar for execution. Will the company be able to successfully open source its WebOS mobile operating system to keep pace with competitors like Apple? Will it revisit its options for the PC business if consumers increasingly look at mobile devices as a substitute for computers?

Meanwhile, HP needs to watch for a feisty Dell that is picking up share in some of its businesses. For both companies, a big potential stabilization to their PC businesses may finally arrive with Microsoft's coming launch of Windows 8. In a March note, Bloomberg Industries makes the point that strong iPad 3 and android based-tablet sales in 2012 may challenge the late-year acceptance of Windows 8. The new iPad is set to launch on March 7 to much hype and interest, making fall 2012 a distant thought for device shoppers.

Until then M&A speculation should not drive investors thoughts on HP. Rather, it's wiser to stay focused on whether the company can start consistently meeting earnings benchmarks and stabilize profit margins.

HP's revenue and profit are expected to fall to $122 billion and $6.7 billion respectively in 2012, according to consensus analyst estimates polled by Bloomberg, who give the company a $31.61 price target. The stock opened Monday below $25 a share, down over 40% in the past year, with its forward price-to-earnings multiple pushed down to a measly 5.7X.

-- Written by Antoine Gara in New York