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And I mean … white hot.
Already this year we've seen 15 transactions with dollar values in excess of $10 billion – the most since the record buyout boom of 2007. And if you add in the smaller deals, too, you're looking at an M&A (mergers-and-acquisitions) market that's up 50% on a year-over-year basis.
And most analysts expect this merger wave to continue.
That's not a surprise. Public companies are rewarded for continued growth, consistency and predictability. And in an uncertain economy, finding "bolt-on" growth can help a CEO put a "checkmark" in each of those three boxes on their objectives worksheet. And with balance-sheet cash at stratospheric levels, a lot of companies can easily afford a growth-grabbing shopping spree.
For investors, a buyout is like a surprise gift – a huge one-time gain that you weren't expecting, but that you're thrilled to receive.
In most cases, however, you shouldn't go out and buy a stock just hoping for a buyout. After all, if it's a marginal company – or, worse, is downright lousy – and no buyout materializes, you still have to have a reason for owning the stock.
And as it turns out, however, several of our recommendations are seeing some intriguing buyout buzz. And we're also going to share a brand-new recommendation that Chief Investment Strategist Keith Fitz-Gerald has given to his Strike Force folks. And given Keith's investment track record – not to mention his predictive prowess (don't forget his recent great call on SanDisk Corp. (NasdaqGS: SNDK), which is up 12% in just three weeks in a lousy tech market) – it's a recommendation that's definitely worth a look.
So let's get started.
And we'll lead off our "Takeover Trifecta" with the Buenos Aires-based Mercadolibre Inc. (NasdaqGS: MELI), also known as the "eBay of Latin America."
In the Crosshairs?
Radical Technology Profits Editor Michael A. Robinson recommended Mercadolibre back in August, and the stock actually gained about 21% in just two months.
Then came the swoon. After running from $120.97 to a peak of $145.99, MELI's shares have dropped to $90, giving us a loss of 25% (underscoring why we advocate the use of "trailing stops" to reduce risk and grab profits).
But some of the financial maneuvering announced this week by online auctioneer eBay Inc. (Nasdaq: EBAY) – another Michael recommendation, and one that's done very well – has fired up speculation that a Mercadolibre buyout may be in the cards.
eBay, you see, announced its first-quarter results earlier this week. As part of that announcement, the San Jose-based company revealed that it's taking a $3 billion tax charge to potentially "repatriate" $9 billion in profits to the United States. If that money is returned, it could be used for stock buybacks or acquisitions, executives said.
eBay claims that it's looking for nimble, fast-growing players that could help supercharge growth. And it does need help: As part of its report to investors this week, the company issued a second-quarter revenue projection that disappointed analysts and said it's on a pace to show no growth for all of this year.
The overseas cash – part of a hoard of $14 billion in cash and other investments in the fourth quarter – could "give eBay some options," S&P Capital IQ analyst Scott Kessler told Bloomberg News. "They're dealing with a lot of competition in a lot of different respects."
Most of the takeover targets the Wall Street crowd was speculating about were smaller outfits, such as arts-and-crafts marketeer Etsy Inc.
But there was also speculation about Mercadolibre – especially since eBay already owns 18% of the company.
MELI had recorded four straight years with growth of 30% or better. But the stock has had a rough time in recent months as analysts keep hitting it with downgrades. It's now a consensus "Hold." And the biggest fear is that Amazon.com (Nasdaq: AMZN) has moved into Brazil, where Mercadolibre gets about 44% of its revenue.
In its most recent earnings report, released back on Feb. 27, Mercadolibre said it earned 93 cents a share – beating the Thomson/Reuters consensus of 78 cents by 15 cents per share. Revenue came in at $134.60 million, also beating the consensus of $133.23 million.
Analysts expect MELI to earn $2.83 for the current fiscal year, meaning the company is continuing its growth.
And with the stock down near its 52-week low, and continuing to execute, it's almost too cheap to ignore – even without a buyout in the offing.
And the upside is huge.
According to one report we perused, Brazil accounts for about 60% of Latin America's e-commerce market. And that market is projected to grow to $22 billion over the next two years, a surge of 180% from current levels. E-commerce accounts for only 3% of total retail volume in Latin American right now, which is why there is so much potential.
One thing we like about MELI is that the company hasn't been "standing pat" in the face of new competition. And that means it is poised to ride this e-commerce wave "south of the border."
The company has bolstered its payment and shipping offerings to improve customer service (the so-called "customer experience") and maintain a high rate of growth. It's also continuing to add muscle to its mobile offerings. Its decision to build around an "open" platform makes it a natural partner for any Latin American venture looking to get into ecommerce in that market.
In fact, while folks refer to it as the "eBay of Latin America," the moniker of "the Amazon of Latin America" might be more apt.
Last year, MELI launched its "MercadoEnvios" program, a move that connects its online and offline services, and that promotes e-commerce throughout Latin America. It's a service that accelerates deliveries, and positions the company as an online shopping mall offering all sorts of products. Major name brands are choosing to sell their wares through Mercadolibre, and now the company is planning to launch "official" virtual stores.
If it starts talking about drones and "MELI Prime," we'll know that the "Amazon of Latin America" is the new descriptor.
"I have to say, Bill, that in spite of what our Wall Street brethren might be thinking about MELI, I really still do like this stock on a long-term basis," Michael told me late yesterday. "When you get right down to it, you're talking about the premium e-commerce play in a large and growing market … a company with great long-term game plan."
That brings us to Private Briefing Buyout Play No. 2 – the San Jose-based TiVo Inc. (Nasdaq: TIVO). And since it was the TV-themed buyout report that got us thinking about this story, I guess it's a fitting addition to this report.
We Interrupt This Broadcast …
TiVo, recommended by Capital Wave Forecast Editor Shah Gilani back in December, is a sector pioneer in the "on-demand" TV realm that has benefited from its "first-mover advantage."
The shares are down about 6.5% since then. But Shah was so confident in the recommendation that he also included it – along with Apple Inc. (Nasdaq: AAPL) – as his entrant in our "Favorite Picks for the New Year" report that's become an annual event here at Private Briefing.
When Shah recommended the stock, he cited several catalysts that he expects will ignite TiVo's shares.
And one was an outright buyout.
As Shah said, TiVo is mostly known as a technology-software company that allows consumers to record and otherwise "manipulate" (rewind or play in slow motion, for instance) video content on their home TVs.
But it's a lot more than that.
"Besides internal and external digital video recorders, TiVo works on set-top boxes, on 'add-on' systems such as the Microsoft Corp (Nasdaq: MSFT) Xbox, and on tablets and smartphones," Shah said. "So that means there's literally no place TiVo can't reach domestically or internationally."
Shah has a knack for "seeing" the hidden potential in companies. In some cases, he ferrets out businesses or capabilities that a company has that other investors don't see or don't understand. Or he might find and decipher the unseen potential for hidden business or financial assets.
Once Shah's made those discoveries, he's able to project the additional "value" that can be created for shareholders. And he gets his subscribers in before this "hidden upside" is widely understood.
Now he's looking for the same sort of action with TiVo – and because of the same kind of multiple-front, "hidden value" evaluation.
"To me, the thing that's the most interesting about TiVo is that it's not known as a search-and-navigation company, or a research company, or a lead-generation company, or an advertising conduit," Shah told me. "But, as I see it, TiVo is all those things."
The "hidden" (undervalued) financial assets are just as compelling, he says.
"Bill, TiVo is sitting on a bit more than $1 billion in cash, and has total debt of less than $175 million," he said. "The company's profit margin is a hyperventilating 85%. It has a total capitalization of $1.5 billion and revenue of $353 million."
And talk about cheap: The forward Price/Earnings (P/E) ratio is only 6.02.
"Even before the sell-off, TiVo has been an unloved stock in what has been a strikingly strong, and clearly historic, market rally," Shah said. "However, I have seen some interesting capital movement into it on dips. The way I see it, there's someone out there accumulating TIVO stock, slowly, so as to not make any waves."
And he's right. Although the broad tech sector has been hit by a sell-off, TiVo shares haven't suffered. That, by itself, is a telling point. And when you take all these in together, you're looking at a stock whose rally could be ignited by many different things – or several things all at once.
"I'm not saying here that TiVo is worth buying just because its 'assets' are underutilized and its technology is the leading technology in the market, and that to build what TiVo has would be twice as expensive as buying it," Shah said. "I'm also not saying that sitting on all that cash makes a leveraged-buyout (LBO) suitor salivate. Or that TIVO makes sense for several companies to buy. No, I'm not saying any one of those things."
In fact, he's saying all of them.
TiVo has made a couple of intriguing announcements in recent days.
Earlier this week, the company said has more than 4.5 million subscribers (including TiVo's retail TiVo-Owned and pay-tv subscriptions) – surpassing the previous record of 4.45 million set back in December 2006.
TiVo has emerged as the leader in successfully bringing advanced television solutions to the "Pay TV" market, and operators around the world are deploying the TiVo offerings – including its "TV Everywhere" service.
In 2011, TiVo had launched its solution with three operators. Today, TiVo has 12 global operators – with three more to join in the near future.
"Our record subscription [totals] are the direct result of TiVo's ability to bring real innovation to the cable industry," said TiVo Executive Vice President Jeff Klugman. "For example, it's noteworthy that mid-size cable operators are answering the desires of their customers for whole-home/multiscreen solutions and access to OTT services like Netflix before the likes of some of the biggest operators in the world. This would not be possible today without TiVo. Our diverse suite of advanced-television products and services help operators empower their customers to easily navigate the tsunami of content available today with a single easy user experience that searches across linear TV, On Demand, and OTT content and delivers all that content, on multiple screens from virtually anywhere. TiVo's solutions are value drivers for operators and are quickly becoming a must-have differentiator in an increasingly competitive market."
And as the possible $40 billion deal for DirecTV underscores, all of this technology, customer rapport and subscriber backing has big-time value.
Just yesterday, in fact, Albert Fried analyst Rich Tullo said that TiVo would be a worthwhile takeover target for Netflix Inc. (Nasdaq: NFLX).
"Acquiring TiVo would enable Netflix to more effectively market its streaming service to consumers that already utilize TiVo's product," Tullo wrote in a note to investors. "TiVo has made deals with cable-TV providers that have roughly 78 million subscribers."
And TiVo's set-top boxes, which can be used in conjunction with the Comcast Corp. (Nasdaq: CMCSA) cable TV service, also can stream Netflix. Even if Netflix buys TiVo at a significant premium to its current share price, such a deal would create $5 billion to $10 billion in additional value for Netflix's shareholders, Tullo said.
Tullo has an "Overweight" rating on TiVo and a $23 price target – which represents a potential gain of 92% from current levels.
A Deep Game
Like all of our experts here at Money Map Press, Keith has the well-developed ability to "see"
over the horizon. Indeed, we have a running joke where I ask if I can borrow his "crystal ball."
Earlier this month, Keith recommended SanDisk as a perfect "rocky market" tech stock. And less than two weeks later, the company released a smashing earnings report that put the stock on the fast track.
In a note to his Strike Force folks on Wednesday, Keith recommended the purchase of Yahoo!Inc. (NasdaqGS: YHOO)shares at prices under $36(it closed at $36.51 yesterday).
And he told his readers to be prepared to add to the position after the Alibaba Inc. initial public stock offering (IPO).
As is usually the case with Keith, it's an intriguing recommendation.
The Alibaba IPO is expected to be the largest tech-stock deal in history, but it's not creating a lot of buzz, Farhad Manjoo wrote in his "State of the Art" column in The New York Times.
"San Francisco's artisanal toast bars have not been abuzz with commentary on Jack Ma, Alibaba's chairman, and Palo Alto's Tesla dealerships aren't bracing for a surge in new buyers," Manjoo wrote.
However, while the IPO is being met with apathy in Silicon Valley, it may be a critical strategic deal globally.
For some time now, U.S. and Chinese technology companies have looked to global domination, while ignoring one another. But now, he said, the Alibaba IPO could signal a shift, "the end of an era of mutually beneficial provincialism." And that could ignite a global battle for users.
If that happens, it makes sense that Alibaba could make a bid for Yahoo – using the U.S. company as a way to grab a big group of American users in one fell swoop.
Yahoo invested $1 billion in Alibaba in 2005, and now owns 24% of the Chinese company.
Keith says he'll be back with a more-detailed "investment case" early next week. But here's a "hint" of what's to come.
"Bill, I think that Alibaba may buy out Yahoo a year from now, or even sooner," he said. "Not only is the size and scope right for an acquisition, but the timing is, too. Best of all, nobody sees this coming and it's all but unthinkable for the Wall Street cognoscenti – both of which have been prime catalysts to significant profits for us in the past. Act now and confine this purchase to 2% of overall capital to keep risk manageable."
We'll follow up with his more-detailed analysis. And I'm sure it will feature some intriguing surprises. His work usually does.
Have a great weekend.
[Editor's Note: Unless otherwise directed (see our original recommendations on MELI and TIVO), we recommend investors employ a 25% "trailing stop" on all holdings.]
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