Boom times are back for private equity: Research firm Preqin reports $453 billion was raised by PE firms last year, topping a 2007 record of $406 billion and leaving PE funds with over $1 trillion in capital to deploy. And as funds have swelled in size, deal sizes seem to be rising too, as Blackstone's (BX) bid for a 55% stake in Thomson Reuters (TRI) drives home.
But with memories of overheated pre-financial crisis dealmaking still fresh, high valuations have restrained PE activity a bit, even with funds adjusting their expectations for returns and hold times. And with the Nasdaq having tacked on close to 3,000 points since early 2016, tech is certainly one of the sectors to see some restraint.
Still, the tech rally hasn't been an equal-opportunity multiple-inflator, and it's not too hard to come across names that both sport reasonable valuations and a fit the profile of a PE target. Here are a few that arguably match the description.
Price/Valuation - Akamai (AKAM) has an enterprise value (EV - market cap plus net cash/debt) of $10.7 billion. Shares trade for 19 times a 2019 EPS consensus of $3.44.
Why it could be targeted: The unmatched size and geographic reach of Akamai's content delivery network (CDN) remains a major competitive advantage. The company has seen healthy growth for higher-margin CDN services in fields such as security, e-commerce and mobile content acceleration. Activist Elliott Management is pushing Akamai to explore its options, and the company is reportedly working with Morgan Stanley to do just that.
Why buyers could think twice: With the qualifier that a PE buyer would likely see room to cut costs, Akamai's valuation isn't particularly low. The company's low-margin media services business has been pressured by efforts from clients such as Apple and Netflix to move traffic onto their own CDNs, and (though they can't match Akamai's reach and feature set) the launch of CDN services from public cloud leaders Amazon (AMZN) , Microsoft (MSFT) and Alphabet/Google (GOOGL) serves as a long-term threat for some workloads.
Price/Valuation - Verisign (VRSN) has an enterprise value of $11.3 billion. Shares trade for 24 times a 2019 EPS consensus of $4.92. But the enterprise value is equal to 16 times 2017 free cash flow (FCF) of $720 million.
Why it could be targeted - Verisign's core domain name registration business is a highly reliable and predictable source of cash flow. Registrations for Verisign's core .com and .net top-level domains (TLDs) continue seeing modest growth, and (with a DOJ antitrust probe related to it having recently concluded) registrations for the .web TLD could provide a lift in the coming years. There might also be soon room to cut Verisign's operating expenses, which totaled $264 million last year.
Why buyers could think twice - With shares up about 50% since early 2017, Verisign isn't as cheap as it once was. The company's security business, which provides managed DNS and denial-of-service protection services, faces a fair amount of competition.
Price/Valuation - Western (WDC) sports a $31.4 billion enterprise value. And that enterprise value is only equal to 9 times expected fiscal 2018 (ends in June) FCF for $3.5 billion. FCF is admittedly expected to drop to $3.1 billion in fiscal 2019, but Western's EV is still only equal to 10 times that multiple.
Why it could be targeted - Shares are cheap, and Western's hard drive business is part of a near-duopoly. Its NAND flash memory isn't, but has room to grow as solid-state drive (SSD) adoption keeps rising among both PC and enterprise/cloud storage buyers. A number of PE firms recently showed interest in the flash memory unit of Western JV partner Toshiba (a Bain Capital-led group won out) RBC analyst Amit Daryanani recently argued that a leveraged buyout of Western at $105 per share (a 21% premium to current levels) could deliver an internal rate of return (IRR) north of 25%.
Why buyers could think twice - Western would be a relatively large target. NAND supplies are set to grow rapidly thanks to big investments from Samsung, Intel and others in 3D NAND production lines, and that has stoked oversupply fears. Hard drive shipments are steadily declining as SSD sales rise, and it's possible that Western's hard drive operations won't be assigned a lot of value in a few years' time.
Price/Valuation - OpenText (OTEX) has an enterprise value of $11.5 billion. That's equal to 17 times expected fiscal 2019 FCF of $669 million.
Why it could be targeted - Looking to transform itself from an enterprise content management (ECM) software firm into a broader provider of information management offerings, OpenText has been on an acquisition spree in recent years. Targets have included analytics software firm Actuate, forensics software firm Guidance Software, HP's customer-engagement software business and most recently cloud file-sharing/collaboration service provider Hightail. A PE firm could see room to further expand OpenText's reach, while streamlining existing and acquired businesses along the way.
Why buyers could think twice - OpenText's M&A strategy carries a fair amount of execution risk. The company also competes with several IT giants.
Price/Valuation - Nuance (NUAN) has a $6.5 billion enterprise value. That's equal to 15 times expected fiscal 2019 (ends in Sep. 2019) FCF of $442 million.
Why it could be targeted - The voice/language software provider has been seeing modest, if unspectacular, growth. CEO Paul Ricci is stepping down, and a successor could be open to a sale. Long-time shareholder Neuberger Berman is pushing for changes. A PE firm could see room to cut spending and/or shed underperforming businesses.
Why buyers could think twice - Suitors could be worried about the growth outlook for Nuance's enterprise and healthcare units, particularly with cloud giants rolling out voice and natural-language processing solutions for developers.
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