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   Strategies & Market TrendsSpeculating in Takeover Targets

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To: richardred who wrote (3551)12/23/2013 12:49:02 PM
From: Glenn Petersen
   of 6649
I think that your assessment is spot on. DealBook thinks that we will be seeing a lot of ill-advised tech deals:

Why Older Technology Companies May Attempt Desperate Deals

New York Times
December 23, 2013, 11:57 am

Beware of old tech seeking the fountain of youth.

Hardware makers including Cisco Systems, IBM and Hewlett-Packard – with a combined two centuries of life among them – are increasingly falling prey to natural selection in Silicon Valley. They’re devouring smaller, newer firms to keep pace, but weaknesses are getting harder to hide. That could lead to bigger, desperate deals for richly valued business software and big data companies.

The signs of carnage can’t be missed. In October, IBM reported falling sales for the sixth quarter in a row, led downward by its hardware businesses. For H.P., it is nine straight quarters of a shrinking top line. Cisco recently said revenue would decline until mid-2014. Even established software and web companies like Oracle and Google are suffering when it comes to sales of servers and smartphones.

Apple is an exception, but its model of peddling highly desirable gadgets with cheap or free software isn’t so easy to duplicate. Further, competition from commoditized mobile devices running Android is biting even the iPad maker. Its sales growth is slowing.

The struggles are notable because financial statements reflect past innovation. Consistently falling sales are hard to reverse and often mean a company’s best days are behind it. BlackBerry is the latest case study. Its revenue actually kept growing even after it brushed off the introduction of the iPhone in 2007. Eventually, that changed – and swiftly.

Acquisitions, combined with cost cutting, tend to be a popular way of trying to rejuvenate. It’s often a losing proposition, though. Control premiums and purchase accounting typically muddle matters. Tech takeovers also have a habit of failing. H.P. alone has written down about $18 billion worth of M.&A .since 2011.

That won’t necessarily be a deterrent, however. Data analyzers like Splunk and Tableau Software, and cloud purveyors such as Workday and NetSuite, are among those with much brighter prospects. NetSuite, at $7 billion, is the “cheapest” among them, trading at nearly 400 times estimated 2013 earnings. Splunk and Workday, with a combined market value of over $20 billion, each fetch over 25 times estimated revenue. Slowing the aging process may prove irresistible to technology behemoths, but it would come at a hefty cost.

Robert Cyran is a columnist for Reuters Breakingviews. For more independent commentary and analysis, visit

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From: richardred12/26/2013 1:37:32 PM
1 Recommendation   of 6649
Good tool for finding TT. The hunters and the hunted.

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To: richardred who wrote (3342)12/29/2013 11:59:44 AM
From: richardred
   of 6649
Interesting statement by the leader of a global company.

snip>"With the low interest rates, hardly anyone wants to swap businesses for money," the Handelsblatt business daily quoted Rorsted as saying in an interview to be published on Monday.

"Opportunities will yet emerge over the coming three years," the CEO said.

Henkel CEO dampens prospects for acquisitions - paper December 30, 2013, 2:38 am

Reuters Flags of consumer goods group Henkel are pictured before its annual news conference in Duesseldorf March 8, 2012. REUTERS/Ina Fassbender BERLIN (Reuters) - German consumer goods group Henkel dampened expectations it was looking at acquisitions soon, saying the market currently offers few takeover opportunities, Handelsblatt reported, citing Chief Executive Kasper Rorsted.

Rorsted's comments contrast with remarks made by Henkel's supervisory board chairwoman, Simone Bagel-Trah, who was quoted three weeks ago as saying that the time had come to focus on takeovers again.

"With the low interest rates, hardly anyone wants to swap businesses for money," the Handelsblatt business daily quoted Rorsted as saying in an interview to be published on Monday.

"Opportunities will yet emerge over the coming three years," the CEO said.

Last month, Rorsted himself said the group was looking at takeover opportunities if they were a good strategic fit and that it had a 4 billion euro ($5.5 billion) war chest for purchases.

In its last major acquisition, Henkel bought National Starch in 2008 for 3.7 billion euros to expand its adhesives division. ($1 = 0.7258 euros)

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To: richardred who wrote (3555)12/29/2013 12:30:18 PM
From: richardred
   of 6649
Apple's cash

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To: richardred who wrote (3437)12/29/2013 12:43:23 PM
From: richardred
   of 6649
In 2014 I have a feeling the Chinese will be back.

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To: richardred who wrote (3555)12/29/2013 1:05:16 PM
From: richardred
   of 6649
How big will GOOG go in 2014. It's not if, but when, and how big. IMO most likely privately negotiated transactions.

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From: richardred12/29/2013 4:20:32 PM
   of 6649
I think healthy food acquisitions will still be targets in 2014.

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From: richardred12/29/2013 4:53:45 PM
   of 6649
IMO 2014 cuts in the Pentagon will make consolidation a priority among big Defense players. A good refresher piece. Textron just recently in the civilian area..

Defense Consolidation: Who Gets Bought First?

Comment Now

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Credit: Clemens Vasters

The biggest defense companies have been planning a long time for this day, cutting costs and streamlining operations. Now they are buying back stock and trying to keep dividend yields above 3% so that investors stay engaged. But if interest rates on ultra-safe Treasuries keep rising and sequestration forces the military to carve another $50 billion out of next year’s budget request, then companies may have to do something more strategic. Like merging.

The Washington Post reported this morning that defense merger activity was actually down in the first quarter, but that is just the calm before the storm. The way sector consolidation has unfolded in the past, one big player decides to take the plunge by selling or buying, and the other players then get drawn in because of the need to protect their market positions. Eventually everybody is contemplating big strategic moves, and knowledge of that fact keeps investors interested even though demand for military goods and services is softening.

Huntington Ingalls May Be The Safest Bet In The Defense Sector Loren Thompson Contributor
How The Pentagon's Top Ten Contractors Dealt With The Last Downturn Loren Thompson Contributor
Five Reasons The Defense Industry Is Still A Better Investment Than Other Sectors Loren Thompson Contributor
Defense Contractors Are Going To Go For The Civilian Market Loren Thompson Contributor
So the question you’re probably asking yourself is where the first big transaction will occur. I don’t mean private equity buying into the sector, because that too is just a prelude to consolidation. Real rationalization of the sector only occurs when contractors buy and sell each other, in the process integrating previously independent operations and reducing the number of suppliers. Private equity typically buys in with the hope it can flip one supplier to another for a higher price than it paid, thereby making a killing.

If you know the defense sector’s past and current circumstances, it isn’t hard to predict where the first sizable consolidation move will happen. It will involve one of the big six contractors buying a mid-tier equipment firm with complimentary product lines. The big system integrators like Lockheed Martin LMT -0.48% and Raytheon RTN -0.21% aren’t interested in buying technical services companies unless they occupy special niches like cybersecurity, because the margins on services are well below those on military hardware, and low barriers to entry in services make it hard to know the long-term value of what you’re buying.

So what the big players with lots of financial resources want are military technology companies with well-positioned franchises — in other words, business lines that are likely to keep generating cash flow for a long time to bolster results as demand flags. But the biggest players were told years ago by Pentagon policymakers that they wouldn’t be allowed to merge with each other because there were so few that competition would be undermined. So demand would have to decline for a long time before the government approved, say, a Boeing BA -0.99% proposal to acquire Northrop Grumman NOC -0.54%‘s military aircraft and space operations. (By the way, most of the companies mentioned here give money to my think tank).

Obviously, if the big boys (and girls) can’t bid for a first-tier military hardware company like General Dynamics because the government won’t allow it, and they’re not interested in getting any deeper into services than they already are, then most of the near-term action in sector consolidation will involve smaller equipment firms. But they must have significant revenues to move the needle on corporate returns for the buyer, otherwise there’s not much point in doing a deal with valuations still relatively rich. So the logic of the situation dictates that the first big wave of consolidation involves first-tier system integrators bidding for second-tier equipment makers.

By second-tier, I mean companies with market capitalizations well above $1 billion, but well below $10 billion. Those are the thresholds that separate the small caps and the large caps in the defense sector from the folks in the middle. If you’re a Northrop Grumman or Raytheon at the top of the food chain with a market cap in the vicinity of $20 billion, then you have all sorts of financial options for acquiring a company in the middle range of players like Alliant Techsystems, which has a market cap around $2.5 billion. Even with the inevitable premium, it would be an eminently manageable transaction adding significantly to the buyer’s cash flow and product diversity.

But here’s the thing about the middle tier of the U.S. defense industry: there are only a handful of equipment makers because most of the medium-size players were snapped up in the last round of consolidation, and precious few pure plays. Pure plays, in the vernacular of the defense sector, are companies that only do business with the Pentagon and related federal agencies, rather than having a diverse array of customers and products. Wall Street prizes pure plays because they are easy to model and understand. Big military contractors looking to get bigger like them because they don’t confuse investors with business lines outside the buyer’s traditional markets.

Let’s look at a few examples of mid-tier companies that aren’t pure plays. Harris Corporation has been a focus of much speculation concerning defense-sector consolidation, but only about a third of its sales in advanced electronics and communications comes from the federal government, so a defense buyer would have to take on a sizable chunk of commercial business to get at its military franchises. Rockwell Collins is a similarly well-positioned supplier of airborne electronics and communications for the military, but nearly half of its sales come from commercial customers like Boeing. And Alliant Techsystems is a dominant supplier of solid rocket engines and ammunition to the military, but much of its recent growth has come from commercial ammo sales.

There may be compelling reasons for why a Northrop Grumman or Raytheon would want to acquire any one of these very well-managed companies, not the least of which is diversification away from heavy reliance on the Pentagon customer. But the path of least resistance during the early stages of sector consolidation will be to acquire well-positioned equipment makers that do nearly all of their business with the military. Two examples would be Huntington Ingalls, the nation’s largest maker of warships that was spun off from Northrop Grumman a few years back, and L3, a $12 billion manufacturer of military electronics, communications and networking products that typically is the number-one or number-two supplier in the product areas it addresses.

Huntington Ingalls and L3 really are pure plays, and both of them have been performing nicely despite the downturn in defense spending (I wrote a piece for on May 20 calling Huntington Ingalls the “safest bet” in the defense business). But Huntington Ingalls is all about warships, so companies would have to be comfortable with shipbuilding to buy it. Northrop Grumman owned the operation for a decade before giving up on trying to make it perform like the company’s other units. L3 would probably be an easier fit for companies that are already in the military electronics business, but it’s just about the biggest of the mid-tiers. In fact, Byron Callan of Capital Alpha Partners rates it as a first-tier player, even though its market cap is less than $8 billion.

And then there is Exelis, the $5 billion military electronics, information systems and technical services company that was spun off from ITT in 2011. Exelis is a near pure play, with 69% of sales last year derived from domestic military and intelligence business, and much of the remainder tracing to the federal government’s civil agencies (NASA, FAA, etc.). The company is a gem in terms of its market positioning and competencies, but it probably is too small to thrive as an independent entity in a shrinking military marketplace despite the fact that it is prime contractor on 80% of its programs.

One reason Exelis would have trouble doing well as a stand-alone going forward is that its competencies are spread across so many different missions, from electronic warfare to force protection to space-based imaging to GPS navigation to air traffic management. Frankly, it’s amazing that a company with a market cap of only $2.5 billion is able to compete successfully in so many areas. In any other country, it would be considered a national treasure. Which is why, to my way of thinking, Exelis is likely to be an early focus of defense-sector consolidation. It is so well-endowed with attractive technology franchises that if and when it decides to put itself on the block, a bidding war might well ensue.

Considering how strong its underlying businesses are, a case can be made that it is Exelis that should be looking for acquisitions in any consolidation wave. However, its relatively small size — it has barely a quarter of Northrop’s or Raytheon’s revenues — plus the circumstances surrounding its separation from ITT leave it at a disadvantage in trying to bid against first-tier firms for attractive properties. So when defense consolidation begins in earnest, Exelis looks to me like the most attractive target for big hardware companies that have been told they can’t buy each other. Maybe that’s why its stock has run up significantly over the last two months.

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To: richardred who wrote (3555)1/2/2014 1:17:22 PM
From: Jack Hartmann
   of 6649
Great chart find. Cheers to 2014 Richard!

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To: Jack Hartmann who wrote (3562)1/2/2014 1:44:02 PM
From: richardred
2 Recommendations   of 6649
Thanks Jack, the same to you. May 2014 be another prosperous year for stocks. It's like what they taught us in drivers ED back in high school. You have to adjust to road conditions. You also never know whats going to be thrown your way. I've been tossed many flat tires.

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