A Look at The Buyout Prospects of Pandora, Yelp and Other Rumored Targets

 | May 12, 2017 | 9:22 PM EDT
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With the Nasdaq up 30% over the past 12 months, higher valuations seem to be slowing the pace of tech M&A activity. But as 2017 deals for firms such as Mobileye, AppDynamics, Angie's List, Nimble Storage and Jive Software show, the market is far from dead. A lot of the deal activity has involved beaten-up names sporting reasonable multiples, but by no means all of it.

Here's a look at some tech names that have either been featured in M&A rumors, or for which there has been deal speculation.

Pandora

The web radio leader said on Monday -- while cutting its full-year guidance and announcing a $150 million investment from P-E firm KKR -- that it's exploring "strategic alternatives." Soon afterwards, CNBC reported Pandora (P) is confident it can sell itself within 30 days, and that it can get out of the KKR deal for $15 million if it sells within that time frame. SiriusXM parent Liberty Media  (LMCA) reportedly made a $15 per share offer (more than 50% above current levels) last year, but in March called Pandora (then trading around $12) overvalued, and suggested $10 was a fairer price.

Working in Pandora's favor: It's now only worth $2.3 billion, it had 76.7 million active listeners as of March, its music algorithms and listener data have value and it has finally gotten a subscription streaming service (Pandora Premium) off the ground. Working against it: Both active listeners and listener hours are declining thanks to the rise of Spotify, Apple Music and other subscription offerings. In addition, Pandora is still losing money -- the 2017 EPS consensus is negative $0.52 -- and the guidance cut suggests Premium isn't doing as well as expected. Pandora might get sold -- if nothing else, chances are that Liberty still has interest -- but a large premium seems unlikely.

Yelp

Following Wednesday's big post-earnings plunge -- in addition to missing revenue estimates, Yelp cut its full-year sales guidance -- there has been speculation that Yelp (YELP)  could be targeted by activist investors that want the company put on the block. Back in 2015, Yelp reportedly hired Goldman to explore a sale, but called off the effort after a few months.

At a valuation of 2.7 times its consensus 2017 sales estimate, Yelp isn't that expensive. The company still claims an unmatched database of local business reviews and a highly engaged mobile audience and still appears to be seeing user growth in the 20% range. Historically, the company's biggest problem has been efficiently scaling a business that relies heavily on small ad deals with local businesses. It also might now be feeling some heat from Google and Facebook's efforts to grow their local ad sales.

But Yelp is still a unique and growing asset. A larger Internet or media firm that thinks it can run Yelp more efficiently (perhaps in part by merging sales forces) could come knocking. Jim Cramer suggested Internet mini-conglomerate InterActiveCorp (IAC) , which just struck a deal to buy Angie's List and merge the company with its HomeAdvisor unit, is a possibility.

Citrix Systems

In March, Bloomberg reported Citrix Systems (CTXS) is working with Goldman to find a P-E suitor or other buyer. It added interest "has been limited so far" due to Citrix's large market cap (now above $13 billion), which could require P-E firms to team up on a bid.

Citrix remains the top player in the PC/app virtualization software market (VMware is No. 2), and also has a meaningful networking and security hardware/software business. With shares still only going for 17 times a 2018 EPS consensus of $5.08, a deal seems plausible if a P-E suitor can foot the bill.

FireEye

The security hardware/software/services firm reportedly turned down multiple buyout offers last year that were below a desired price of $30 or more per share. If FireEye  (FEYE) has tempered its expectations some, a buyer could be drawn to the unique assets it has in fields such as malware-detection products, endpoint protection software and threat intelligence and incident-response services. Names mentioned in past speculation include IBM and Cisco.

A better-than-expected Q1 report could leave FireEye more confident about its ability strike an acceptable deal. Shares are up 21% since the report, but still trading below $15.

Nutanix

After getting clobbered in March due to weak guidance, Nutanix (NTNX) is barely trading above its $16 September IPO price, when it jumped 141% on its opening day. The company is still a top enterprise provider of "hyperconverged" systems that integrate server, storage and virtualization functions and can scale to thousands of nodes. But it seems to be facing tougher competition from Cisco and HP Enterprise -- the latter recently bought Nutanix rival SimpliVity for $650 million -- and perhaps also VMware's software offerings for enabling hyperconverged systems running on third-party hardware.

Cisco is still seen as a potential Nutanix suitor, owing to the latter's software strengths and large customer base. The networking giant reportedly bid $4 billion for Nutanix when it was private. Nutanix is now worth $2.3 billion, and trades for just 2.3 times its fiscal 2018 (ends in July 2018) revenue consensus. But its losses are still substantial.

Cypress Semiconductor

Cypress Semi's (CY)  core microcontroller market has been rapidly consolidating, with major players such as Atmel (acquired by Microchip) and Freescale (acquired by NXP, which is now getting bought by Qualcomm) having been snapped up. Cypress' strong automotive exposure could appeal to an industry peer, as could its growing IoT Wi-Fi/Bluetooth chip business. And with a current $4.4 billion valuation, a lot of companies could digest it.

Cypress M&A rumors have popped up from time to time since long-time CEO T.J. Rodgers stepped down in 2016. The company has a pretty reasonable valuation of 13 times a 2018 EPS consensus of $1.02, even after accounting for $1.2 billion in debt. But with the stock up strongly from its single-digit 2016 lows, Cypress might not feel a lot of pressure to sell.

Optical Component Firms

Speculation that a still-fragmented optical component market will further consolidate has been going strong for a couple of years. Stifel argued in December that Oclaro (OCLR)  would be a "very logical fit" for Finisar (FNSR) .

NeoPhotonics  (NPTN) has also been viewed a buyout target. So have Lumentum (LITE)  and Applied Optoelectronics (AAOI) , but their big rallies over the past 12 months could dissuade suitors (or perhaps motivate the companies to turn into buyers themselves). Finisar, NeoPhotonics and Oclaro have been stung recently by softening Chinese demand. Demand from cloud data center owners is still generally healthy.

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