With mergers and acquisitions continually making headlines in the technology sector these days, we wanted to speak with Zacks senior technology analyst
Steve Biggs, CFA about how this might impact his outlook on this industry, as earnings season begins to heat up.
Earlier this week, Hewlett-Packard announced it was buying out one of you small-cap companies, Opsware. What do you make of this?
Well, it makes sense. It's a perfect fit for
Hewlett-Packard (HPQ).
Opsware (OPSW) is in the emerging space of data center automation. I think this is an important area, as data centers become more complex, and it fits in with what Hewlett-Packard does as far as managing their servers that go into the data center.
They've been in this a little bit with their OpenView software, and actually tried to compete head-to-head with Opsware, but Opsware has a much stronger product offering. I see this as a good fit as far as complementing what Hewlett-Packard already has on the software side, as well as making them a stronger competitor against companies like IBM (IBM) on the similar hardware/software space, and then also some similar software companies that are in the business, such as Computer Associates (CA).
So for HP, this is a very good deal. You previously had a Buy rating on Opsware, but you've downgraded on the news. You're not expecting a better deal, I take it?
No, probably not, at this point. Although it would make sense for someone like an IBM or even a CA to get involved, I think both HP and Opsware like this deal. Marc Andreessen, founder of Netscape, has a pretty good-sized chunk of these holdings - I believe about 19%. Also, CEO [Ben] Horowitz of Opsware actually once worked for Hewlett-Packard. So I think he's going to continue on with the company and kind of run the division at Hewlett.
So I think this is a pretty good match. I think for someone else to come in, it would have to be at quite a bit higher than what the current price is, which is $14.25 in all cash. With the stock trading at $14, that's why I chose to downgrade it and adjust the price target to $14.25.
Technology in general has seen a fair number of buyouts and companies taken privately over the past couple years, hasn't it?
That's true, and actually it's been heating up over the past quarter or so I've had quite a few companies get acquired - both strategic acquisitions and private equity deals. Other notable ones would include, in the Internet space, Microsoft (MSFT) in the process of acquiring aQuantive (AQNT) and Google (GOOG) acquiring Double Click. Both of those are Internet advertising, which is also an emerging area, and that sector has been consolidating pretty rapidly.
Is it mostly in that space?
There are a few other industries within technology that have seen some consolidation as well. On the hardware side, we've seen Symbol Technologies acquired by Motorola (MOT). That's a pretty good fit, as Symbol does wireless bar scan and RFID, which is an area that Motorola is interested in. Komag was acquired by Western Digital (WDC), which makes sense, as Komag produces thin-film media which goes into the hard disk drives. So it's a vertical consolidation move by Western Digital.
So do you see this trend continuing over the next several quarters, or at least through the end of the year?
Yeah, I would expect to see continued consolidation. At this point, I don't think equities - at least not in the technology sector - are overvalued, and that's been attracting some acquisitions. Also, on the private equities side we've seen, for example, 24/7 Media being acquired by private equity. And then on the IT services side, which is more of a value play, we've seen quite a bit of equity dealing.
Are there any final words you may have for investors who are looking to maybe make a play off of this?
Well, you know, that's hard to say, and I'd hate to pick stocks just based on the chances of a merger, because that's hard to forecast. Rather, I'd look for solid companies that have a technology that might be attractive to acquire, such as OPNET Technologies (OPNT). This is similar to what Opsware does - along the same lines, some overlap - but they're a little more focused on the higher end of the market. More the analytics than data center automation software. So their customers would be probably for the most part larger companies, but they do partner with Opsware, and it would be a nice fit with that whole sector.
OPNET is another small-cap company in your coverage, and you have a Buy recommendation on it?
Yes, and yes I do. Based on fundamentals of the company, but it could also be an acquisition target down the road.
Steve Biggs, CFA is a senior technology industry analyst for Zacks Equity Research.
