5 tech companies to acquire

Experts share with ZDNet Asia what to consider when acquiring companies and five technology players worth forking out money for right now.
Written by Ellyne Phneah, Contributor

Rumors of acquisitions are commonplace in today's technology industry and it is important evaluate carefully in order not to make the wrong acquisition, experts say.

Acquisitions can give access to a great technology or technical capability that has competitive advantage, access to a customer base that has been under-monetized and execution scale that leads to cost savings after the acquisition, Jayesh Easwaramony, vice president of ICT practice at Frost & Sullivan, told ZDNet Asia. At the same time, valuations must be sensible to have room for sufficient returns on investment (ROI), he said in an e-mail.

Carter Lusher, research fellow and chief analyst at Ovum's enterprise application pointed out that reasons for acquisitions run broadly, such as taking out a competitor, entering a new market, buying a revenue stream, acquiring scarce talent or "outsourcing research and development (R&D)".

Acquisitions can be either strategic or tactical so potential acquisitions are evaluated at many different levels, he said in his e-mail. There are also delicate forces at play--the right acquisition for the wrong reason or price can quickly become the "wrong acquisition", he warned.

Against a backdrop of rapid change in the industry, industry observers shared with ZDNet Asia five tech companies they consider to be currently worth acquiring.

1. Yahoo
With its page views and relatively strong branding, Yahoo makes a good acquisition candidate for anyone who wants access to a large user base, noted Easwaramony. The Internet brand also appears to be a company that "needs direction" or ought to be "split into two companies"--one focused on digital media and the other on e-commerce, he said.

Michael Yoshikami, CEO and founder of YCMNET Advisors, reported that Yahoo's worldwide unique visitors grew 13 percent in the second quarter this year, despite Google's dominance in the search market.

Furthermore, Yahoo holds "some attractive assets" in Asia, Yoshikami added in his e-mail. As of June 2011, it has a 43 percent stake in Chinese Internet company Alibaba group, and 35 percent of Yahoo Japan. The search giant also has a "strong balance sheet, with US$3.3 billion in cash and no long-term debt as of end-June this year, he added.

Key potential acquirers include Microsoft, Alibaba and private equity firms, Yoshikami noted.

2. HP's Personal Systems Group (PSG)
Lusher of Ovum argued it is not a "far-fetched" idea that Tata Group will acquire Hewlett-Packard's Personal Systems Group (PSG). The combination of Tata Consultancy Services (TCS) and HP's PSG unit, he suggested, could take on IBM and Oracle as a "mega-vendor" or one-stop shop for enterprise and public sector IT".

HP's PSG, the Portland, Oregon-based analyst noted, is more than desktops and laptops PCs, and a "brutally low-margin business". According to him, PSG has x86 servers, mobile computing, networking and most importantly, intellectual property, patents, "smart engineers" and a global partner and channel network.

"Combine Tata Consultancy and PSG, throw it a few targeted acquisitions for high-end servers and storage, and add in the 'secret sauce' of Indian brains and experience gained in the Silicon Valley--'Tata Global Computers' could quickly become a major competitor," he said.

He added that the PC unit can be acquired at a "major discount today" because of former CEO Leo Apotheker's "bone-headed" announcement in August that the company was considering selling or spinning it off.

Responding to rumors of Oracle acquiring HP in its entirety, Lusher said that "makes the least sense" as HP's broad consumer and enterprise portfolio would not complement the enterprise IT mega shop strategy.

"There are too many parts of the HP portfolio that would not support a mega-vendor strategy and those parts that do already have competing products at Oracle," Lusher said. "The only part of HP that would make sense would HP Enterprise Services to fill in a gap in Oracle's portfolio."

3. Research In Motion (RIM)
RIM is another candidate for acquisition, as it does not have "sufficient muscle" to drive an ecosystem and defend market share in the smartphone market at the same time, said Easwaramony.

Yoshikami added that since early 2010, RIM had focused on QNX, its new operating system (OS) for smartphones, even acquiring The Astonishing Tribe to help. However, the company needs to improve its user interface.

Research in Motion has a strong enterprise presence, but its ecosystem of third-party apps is "far behind" that of Apple and Google, he pointed out.

"Having lost market share in the U.S., RIM has an opportunity to grow in emerging markets," he said. "The company could have some patents that might make it attractive."

Potential acquirers include Microsoft or a private equity firm, he added.

4. Netflix
Netflix has built a portfolio of digital content through its contracts with cable networks or studios, and recently enhanced its digital library by establishing multi-year contracts with networks and studios including AMC, Dreamworks Animation and NBC Universal, Yoshikami said.

The digital giant has a large base of subscribers--as of mid-September this year, the management forecasted Netflix would end the third calendar quarter with 24 million subscribers, he added.

The company's current valuation appears to be attractive--in acquisition terms--compared to its Internet or e-commerce peers, Yoshikami noted. At about US$112, Netflix shares have fallen more than 60 percent from the peak level of US$304.79, he explained.

Possible acquirers include Amazon, Google and Apple, he said.

5. Informatica
As a leading independent provider of data integration solutions, a key potential acquirer for Informatica will be Oracle, due to an overlap between the two companies' offerings, Yoshikami noted.

"However, Oracle's motives could include keeping Informatica out of the hands of competitors, removing a platform-agnostic competitor from the field, and access to its client base," the investment advisor said.

Other potential acquirers include SAP, IBM, CA Technologies, EMC, BMC and VMware, he said.

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