The activity by activists and by private equity firms in the large-cap technology space has accelerated over the last few months.
Michael Dell and Silver Lake made a bid for Dell (DELL) only to find resistance from existing shareholders despite the substantial premium to the current price at the time. Blackstone (BX) and Carl Icahn have now joined the fray in the battle for this iconic computer maker. David Einhorn has garnered substantial attention for his crusade on Apple (AAPL) to use its massive cash hoard to significant increase its dividend payouts.
My take is that Dell will be taken private, but at a slightly higher price than the $13.65 per share Michael Dell and Silver Lake offered originally. I will not speculate on who the winning bidders are or how the buyout will be structured. As for Apple, I believe we will get a substantial dividend hike soon. A poll of analysts by Bloomberg has a 56% dividend increase right now as a consensus. This would give the tech juggernaut an over 3.5% yield in addition to its low valuation. As for BMC Software, I think this will have a similar path to Dell with much back and forth before a higher buyout offer finally emerges.
So given that the sector is attracting more and more attention from private equity and other activists, which undervalued large tech stocks could attract activists next? I think CA Technologies (CA) and Xerox (XRX) are possible candidates. Both have longstanding customer relationships, steady cash flow and are cheap. The first is more likely to be bought out at some point. The second already has a significant transformation under way, but still could attract some activist attention.
CA Technologies provides enterprise information technology (IT) management software and solutions in the United States and internationally. The company operates in three segments: Mainframe Solutions, Enterprise Solutions, and Services.
Four reasons CA is undervalued at $25 a share:
- The company has a similar profile to BMC in servicing enterprise customers with mainframe solutions. It is roughly double the size, but, given is valuation on a trailing earnings, it makes a logical buyout candidate. Plus, its price-to-sales basis is less than BMC's.
- The stock is cheap, trading at less than 10x forward earnings, a slight discount to its five-year average (11.6).
- CA is even cheaper on an operating cash flow basis where the stock sells for just over 7x operating cash flow. It also has a solid balance sheet with approximately $1B in net cash on the books. It would be relatively easy to lever up the balance sheet to pay a "special dividend" for an entity that took over the company.
- The stock is selling at the bottom of its five-year valuation range based on P/E, P/S, P/CF and P/B.
Xerox provides business process and document management services worldwide. The company's Services segment offers various business process outsourcing services, which now account for over 50% of revenues with the rest coming from its copier business.
Four reasons XRX still has upside from under $9 a share:
- This would be a huge buyout -- just under $18 billion including debt. XRX is well on its way, however, to transforming itself to a higher margin services provider and the stock is priced at 4x operating cash flow (7x if you include debt).
- An activist could possibly sell or spin off the copier business to focus on the less capital intensive services businesses.
- XRX pays a solid yield of 2.7% while waiting for the transformation to complete.
- The stock is cheap, trading at just 91% of book value and just over 7x projected 2014's earnings.