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Strategies & Market Trends : Speculating in Takeover Targets
CTG 8.350-0.1%May 23 4:30 PM EDT

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To: richardred who wrote (2344)10/20/2010 10:41:15 AM
From: richardred   of 6274
Three Likely Buyout Candidates in Tech
Credit Suisse says Novellus, Teradyne and Verigy could be targeted.

Credit Suisse

WE EXPECT AN INCREASED level of leveraged-buyout (LBO) activity in the market over the next few quarters and we think semiconductor-capital equipment (SCE) companies screen as attractive candidates for an LBO. If an LBO event occurred in SCE, we believe it could improve valuation multiples for the sector.

In particular, our multi-scenario, company-level LBO analysis for all the SCE stocks in our coverage universe suggests that Novellus Systems (NVLS), Teradyne (TER) and Verigy (VRGY) screen as the most likely LBO-takeover candidates from a valuation perspective. These three stocks show 22% to 56% upside in an LBO event under a stressed and baseline capital-expenditures scenario, and yet return 20% internal rate of return (IRR) to potential private equity buyers.

Verigy and Applied Materials (AMAT) may also be of interest from a strategy change perspective – in both cases, focusing on profitable product divisions by exiting unprofitable ones, optimizing operating expenses to stream line research and development, and pursue mergers and acquisitions for inorganic growth could be attractive options to increase share-holder value.

There is precedence for such restructuring – we note that Novellus and Teradyne management have driven such effective and notable restructuring activities in the last five years. The lithography sector ASML Holding (ASML) and Cymer (CYMI) screen as the least likely candidates for an LBO at current valuations.

Recently, there has been an increase in LBO activity in the stock market. We expect this may continue over the next several quarters. Last week, it was reported in the media that Seagate Technology (STX) may be in talks for an LBO by private-equity firms. There has been evidence of an improving high-yield debt market since the credit crisis two years ago.

Interest rates are at low levels, and talks of quantitative easing may allow a gradual increase in risk appetite by investors in pursuit of higher yields. While fundraising for private equity remains tough, funds raised in the bubble years of 2005-2007 are nearing the five-year mid-point of their 10-year terms.

Private-equity funds plan around a five-year horizon from entry to exit, implying there may be an increase in private-equity-driven LBO activity over the next two years as these funds near mid-life. Private-equity funds will likely not be keen to pay the 10 to 12 times enterprise value/earnings before interest, taxes, depreciation and amortization (EV/Ebitda) multiples of the last peak, but valuations in the semi-cap space have significantly compressed this cycle, and are now trading around five-to-six times EV/Ebitda, below the EV/Ebitda threshold that makes LBO scenarios more plausible.

-- Satya Kumar
-- Brandon Heiken
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