Dell’s Quest – Why? How to Find the Next Tech Acquisition

by Gary Spivak

How many times have you said to yourself, “I should have bought that stock yesterday,” after an acquisition of that same company was announced? Stocks tend to “pop” when they’re being acquired, or even when they’re rumored to be an acquisition target.

For instance, on March 8, 2012, Quest Software closed at $19.40. The next day it announced that an investment firm was taking it private at $24 per share. Then on July 2, Dell announced that it was acquiring the company for $28 per share, or a 44% premium to the March 8 closing price.

Well, sexy usually sells. But sometimes, the sexiest girl is not the one you bring home to meet Momma! Dell’s (Nasdaq: DELL) acquisition of Quest Software (Nasdaq: QSFT) is a perfect example.

Large technology companies tend to fill gaps in their offerings by acquiring smaller technology companies. In an earlier article, Can Oracle Be the Next IBM?, we pointed out that many technology companies emulate IBM’s broad approach. In that race,Dell has a long way to go and needs to aggressively add software companies. Anticipating the next target for acquisitions can be tricky, but with so many potential acquirers,Dell, HP, Oracle, EMC, Cisco and even IBM, it can also be very lucrative.

“Handicapping” Acquisition Targets

Now, how does one attempt to “handicap” the next acquisition wave? I could tell you to look for companies with good niche technology that are under $2 billion in market capitalization and trade at a below average EV/EBITDA ratio. And that would be valuable. But that’s also where you would look to buy any small-cap stock, isn’t it?

To try to play the “who’s the next acquisition target” game, it’s best to look at the natural tech acquirers, understand what they’re doing and look to the sectors that help them bridge their gaps. Then, take a look at the smaller companies that provide those services.

Dell is a great place to start. With a challenging and increasingly commoditized PC and server business, it must look elsewhere, as we suggested in our earlier piece, to look more like IBM does. But where is Dell weakest?

Clearly, it’s in the realm of enterprise software…

What’s that, you say? You’ve never even heard of Quest Software before the acquisition speculation took root? Well, I’m sure you’re not alone.

Quest earned its stripes as a vendor of database management tools. It then expanded into other management tools. Are you still awake? Do you need to be?

In 2010, Dell tried to buy 3Par Technology, a maker of storage devices. It did this at a time when HP, probably its primary competitor, had “fallen asleep” on the M&A front due to distractions surrounding Mark Hurd, its former CEO (and now President of Oracle). When Hewlett-Packard (NYSE: HPQ) realized that IT should be the one to acquire 3Par, it rebounded and decided to get into a bidding war with Dell for that company, rather than lose it to Dell. HP “won” that battle.

Dell, with its nose bloodied, went after Compellent, a smaller competitor to 3Par. It acquired Compellent and planted a flag that data and data management was important to the company.

As databases sit on storage devices, it made complete sense for Dell to go after a software vendor that helps manage databases. In this case, it went after Quest.

Does HP need to respond to this? Possibly.

One Target to Watch

Keep an eye on Pervasive Software (Nasdaq: PVSW). Pervasive is a global data innovation leader, delivering software to manage, integrate and analyze data, in the cloud or on-premises, throughout the entire data lifecycle.

What makes this interesting is that Pervasive was recently offered an unsolicited bit by Actian Corporation for $8.50 per share. Actian is not a big player. HP and Dell are.

This is a fit for either HP orDell, and is already “in play.” Deeper pockets may come a-knockin’, because the technology is a fit, and the cost (the current market cap is around $130 million) is not nearly prohibitive for the larger vendors to complement their offerings.

So – look at what the big dogs are missing. Think like them. They get outwitted and outplayed from time to time, so you stand a decent chance of anticipating their next move.

Good Investing,

Gary Spivak

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