Why NetApp Is a Perfect Takeover Candidate

Source: NetApp.com

With borrowing costs at all-time lows, and the demand to create and store all kinds of data increasing, now would be a great time for an acquisition in the technology sub-sector often referred to as “data solutions providers.”

When you think of data-management and storage-solutions providers for gigantic databases like the federal government or the largest growing corporate titans, there are only a few names that come to mind.

Although technology stocks are not getting much respect these days (up to this Monday, only Apple seemed to be a must-own tech stock), there are numerous companies that are still very profitable and priced for buying.

Chris Hyzy, who co-manages $334 billion in assets at U.S. Trust, said in a CNBC interview on Sunday, there are pockets of real growth in the technology sector, citing themes in the cloud computing area, mobile payments areas, software, and cybersecurity.

In the same CNBC interview, it was mentioned that Oracle is one large-cap tech some strategists suggest considering. Art Hogan of Lazard Capital Markets, said the software giant sits in the sweet spot of middleware and software. “The shares are also cheap,” Hogan pointed out.

“When you back out the amount of cash they have on the balance sheet, you are looking at a multiple of only nine times,” Hogan said. “Obviously a reasonable multiple when theS&P is trading at 14 times.”

Oracle has $30.68 billion in total cash as of its last quarterly report and levered free cash flow (trailing 12 months) of close to $12 billion. It has been predatory when it comes to growing by acquisitions in areas that it can integrate in its profit-making business model.

Having recently heard a report on National Public Radio that founder Larry Ellison purchased the Hawaiian island of Lanai for around $500 million, I wondered if it’s about time for Oracle to expand its already vast array of products and services? Perhaps a foray into the data-storage business would empower it to create even more cash flow and earnings per share. One way it could do this is by acquiring a company like NetApp. NetApp has a $12.6 billion market cap and creates innovative storage and data-management solutions for a wide array of companies. On Sept. 5, it was ranked No. 51 out of 100 on Forbes magazine’s list of the “World’s Most Innovative Companies” for 2012.

“Customers around the world choose us for our ‘go beyond’ approach and broad portfolio of solutions for business applications, storage for virtual servers, disk-to-disk backup, and more. Our solutions provide nonstop availability of critical business data and simplify business processes so companies can deploy new capabilities with confidence and get to revenue faster than ever before,” says its investor-friendly, informative website, which I encourage you to explore.

Yet from a key financial statistics point-of-view, NetApp needs help with its anemic profit margin (8.52 percent) and its 10.58-percent operating margin. It has revenue of $6.22 billion, but if it’s going to move its share price back up to the $46.80 52-week high, it’s going to need to drastically improve on its earnings-per-share, which dropped 54.3 percent (year-over-year) in its last quarter.

Its five-year chart indicates that the share price of NetApp relates strongly with its earnings-per-share growth, which peaked in the middle of 2010 and again in the first half of 2012. Since then, it appears to have experienced a sharp decline.

The need for data-storage solutions, enterprise-storage systems and software to be deployed in storage-area networks is growing by leaps and bounds. One of the three biggest names in this space is EMC. This tech powerhouse, which also owns a good portion of VMware, just felt the competition in the data-storage business heat up.

International Business Machinesannounced on Sept. 24 that it purchased a private company that offers storage-planning software and storage-migration tools. This may give IBM an advantage in the increasingly complex world of data-center management as virtualization, data growth and the use of cloud technology to solve data-storage issues evolve. What would help EMC come from behind and take the lead? Perhaps the acquisition of a well-established, highly innovative company like NetApp could propel EMC into the virtual lead in this three-company race that supposedly includes Symantec.

Symantec is the third competitor in this race to become the go-to storage-software provider. Along with IBM and EMC, they all want to attract customers who are having difficulty dealing with their costly data storage centers.

EMC, with its deep pockets ($5.65 billion in total cash) and its $58 billion market cap, could figure out a way to absorb NetApp. It would be a stretch, but bigger coups have been pulled off in the world of technological dominance.

With the current share-price pullback in this sector, the possibilities of a company like NetApp being “swallowed” by a much bigger “fish” is both realistic and, for NetApp shareholders, very promising.

With these technology companies, if you’re interested in owning their shares, then be a smart buyer. As my admired colleague Jim Cramer pointed out Tuesday on Real Money, “Good trading, as well as good investing, can often be a function of entry points where you make your first buys. ... You simply don’t want that first buy to be too high. You want it to be where, if the stock goes down, you can buy some more without feeling you are going out on a limb or making a good-money-after-bad decision.”

I couldn’t agree more!

—By TheStreet.com Contributor Marc Courtenay

Additional News: Oracle Meets Earnings Forecast

Additional Views: Record High for S&P Next Year: Expert

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At the time of publication, Marc Courtenay held no positions in any of the stocks mentioned, although positions may change at any time.