Is a Tech Buyout Frenzy on the Horizon?

Eric Bleeker, The Motley Fool
Updated

After extending losses from Friday's sell-off in the morning and afternoon, the Nasdaq managed a late-day rally that left the index up 1.1%. Today, we're checking in on two of the top storylines developing over the past 24 hours in technology.

Tech News No. 1: Chip consolidation is back in
Amid companies pulling back guidance and warning of trouble ahead, the technology sector is barreling ahead with plenty of merger-and-acquisition action. Today's headliner was Broadcom (NAS: BRCM) , offering a steep 57% premium for NetLogic Microsystems (NAS: NETL) .

Netlogic has been among the quicker growers in the chip industry. Its sales shot up from $96.8 million in 2006 all the way to $381.7 million last year. However, this growth hasn't come with outsized earnings gains. Despite stellar gross margins, NetLogic posted a pedestrian 4.6% operating profit margin in 2010.

Broadcom believes it'll be able to spur further bottom-line gains by leveraging its leadership in the networking-chip space to drive more adoption of NetLogic's high-tech networking processors. Expanding sales to more networking companies has long been NetLogic's aim. In 2006, Cisco (NAS: CSCO) accounted for 61% of NetLogic's sales, today that figure sits at a far more manageable 27% as sales have diversified across the industry.

An interesting side note to the acquisition is that Broadcom is willing to pay such a premium while networking stocks like Cisco that sell to end customers languish. That raises an important point that the competitive dynamics along each part of an industry value chain are different. While Cisco might be struggling to control margins after it invited further competition when it stepped on its former partner's toes, networking in general is still seeing explosive growth.

In the coming months, be on the lookout for more possible mergers in the space. Broadcom's main rival, Marvell, is also cash rich and could look to make a buy of its own. Investors bid up smaller networking-chip plays EZChip and Cavium today in anticipation of further buyout action.

Tech News No. 2: Patents are still hot
Interest around mobile-patent specialist InterDigital (NAS: IDCC) has been white hot all summer. The company owns 8,800 patents, including ones fundamental to wireless communication. With all the mania surrounding mobile patents, the company has taken advantage of the situation and hired an investment-banking team to explore selling itself.

With just weeks to go until first-round bids are due, Bloomberg reports that buyers are starting to line up. On the obvious end are Samsung and HTC. Samsung accounted for 26% of InterDigital's revenue last year, so the company probably has good insight into the value of its patents. HTC has been trying to gain better patent protection after agreeing to stiff terms with Microsoft (NAS: MSFT) on Android licensing issues.

Speaking of Microsoft, both it and Apple (NAS: AAPL) have shown interest in InterDigital as well. The two joined an earlier consortium to purchase Nortel's patent portfolio and have both looked for further patent acquisitions since.

On the more surprising end of bidding, Google -- which was seen as an early front-runner in the InterDigital sweepstakes -- is reportedly losing interest now that it has Motorola's patent trove. However, the most surprising entry is Intel (NAS: INTC) . The processor giant has ramped up its efforts to become more competitive in the mobile space. For example, last year it bought Infineon's wireless-chip unit for $1.4 billion. Buying InterDigital would be an even more aggressive move.

InterDigital is already worth about $3 billion, and there's speculation that final bidding for its patents could reach higher than $5 billion. It's unclear whether Intel would fold the patents into its existing operations or cross-license them to companies willing to use its processors in mobile devices to spur adoption of its mobile chips. However, what is clear is that if the company shells out north of $5 billion for mobile patents, it'll be Intel's biggest "all-in" moment in the mobile race.

That's it for today's tech recap. To stay apprised, add any of the major companies mentioned here to our free My Watchlist service today:

At the time thisarticle was published Eric Bleeker owns shares of Cisco. You can follow Eric on Twitter to see all of his technology and market commentary. The Motley Fool owns shares of Google, Apple, Marvell, Intel, Cisco Systems, and Microsoft, has bought calls on Intel, and has created a bull call spread position on Cisco Systems. Motley Fool newsletter services have recommended buying shares of Microsoft, Cisco Systems, Google, Apple, InterDigital, and Intel, creating bull call spread positions in Apple and Microsoft, and creating a diagonal call position in Intel. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Copyright © 1995 - 2011 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

Advertisement