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Strategies & Market Trends : Speculating in Takeover Targets
ULBI 9.980-1.2%Jun 20 3:59 PM EDT

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To: richardred who wrote (2344)11/15/2010 10:46:09 AM
From: richardred  Read Replies (2) of 7058
Buyout Time? Shopping For LBOs In Chip, Equipment Sectors

By Eric Savitz

Could we see a wave of buyout activity in the semiconductor and chip equipment sectors?

As it happens, a pair of analysts independently wrote about that possibility in a pair of research notes this morning.

* Citigroup analyst Timothy Arcuri weighed in the equipment sector, asserting that the prospects for buyouts in the sector have improved. “Despite the inherent cyclicality of our sector, most equipment companies have vastly improved their earnings leverage and have seen better cash flows in this cycle – even at comparable revenue levels to prior cycles,” he writes. “Combined with lower valuation, this has driven a recent increase in talk of equipment companies going private,” in particular Lam Research (LRCX). He says a screen for potential LBO targets yields 10 names with potential returns north of 20%. He declares Novellus (NVLS), Verigy (VRGY), Veeco (VECO), Teradyne (TER) and ATMI (ATMI) to be the best targets.
* Susquehanna Investment Group analyst Chris Caso, meanwhile, went searching for LBO candidates in the semiconductor sector, and found the picking a little slimmer. Caso asserts that “only a few semi companies make sense as potential LBO candidates given the recent rise in share prices and other constraints.” Caso writes that his analysis suggests an LBO would be possible for Microchip (MCHP), LSI (LSI) and Advanced Micro Devices (AMD), but would be more difficult for Nvidia (NVDA), Marvell (MRVL) and Micron (MU). “We would note that in pursuing this analysis we are not suggesting private equity investors have an active interest in any of the subject companies,” he writes. “Rather, we are presenting this analysis as an alternate valuation method, which should be of interest to public equity investors. In short, if the economics of a private equity deal make sense at current share prices, then this can provide a valuation backstop for stocks.”
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