Tech Takeovers: Nine Good Bets for 2011 Stock Gains

At least one 2011 market trend is expected to continue from 2010: Big tech companies will keep buying up medium ones.
At least one 2011 market trend is expected to continue from 2010: Big tech companies will keep buying up medium ones.

In September, I suggested that more big tech companies would soon buy medium-sized ones. Since then, the companies I highlighted as potential takeover targets enjoyed a 25.4% rise, outpacing the S&P 500's increase by 13.8 percentage points -- nearly double the growth -- during that time. In November, EMC (EMC) announced it would buy one of them, Isillon Systems (ISLN), and in December, Dell (DELL) said it would buy another, Compellent Technologies. Are medium-sized tech companies still a good bet for stock gains in 2011? Yes.

Some huge tech companies retain plenty of appetite for growth through acquisition. Three big acquirers, Intel (INTC) Hewlett-Packard (HPQ) and International Business Machines (IBM), bought more than 2,700 companies last year and still spent only a fraction of their cash, according to Bloomberg. Add Oracle (ORCL) and Cisco Systems (CSCO) to the pool of potential big buyers and you have total cash of $107 billion -- and market capitalization totaling $667 billion -- to use as potential acquisition fodder.

High tech mergers are in good shape to continue in 2011. While overall 2010 merger activity improved, it remains below its 2007 peak. Thomson Reuters reports that at $2.4 trillion, the global dollar volume of announced mergers rose 23.1% in 2010 and merger volume was up 14.2% to $822 billion. Moreover, the premium paid over the market in high tech mergers was a compelling 43% -- ranking it sixth out of 12 industries that Thomson Reuters tracked.

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Here are the eight companies I highlighted back in September, ranked by their stock-price growth from Sept. 21 to Jan. 3:

  • Compellent Technologies (CML), +54%

  • Checkpoint Software (CHKP), +34%

  • Fortinet (FTNT), +34%

  • Isillon Systems (ISLN), +33% (through Nov. 17, when EMC bought it)

  • Quest Software (QSFT), +16%

  • Symantec (SYMC), +14%

  • Teradata (TDC), +14%

  • MicroStrategy (MSTR), +4%

Bloomberg's list of best tech stocks of 2010 also included the following fast growers that I think could be targets for Cisco:

  • Acme Packet (APKT), a manufacturer of devices that help networks transmit phone calls and video, gained 428% for the year ending Jan. 3, 2010;

  • Riverbed Technology (RVBD), which makes equipment to boost networks' speed, grew 228%; and

  • F5 Networks (FFIV), which sells software to manage Internet traffic, is up 153%.

I wouldn't be surprised to see one of these nine available companies acquired by a big tech company in 2011.