Consumer & Business Computing/IT: A Perplexing World For Investors – International Business Machines Corp. (IBM)

The company had appointed Frank Quattrone, a technology investment banker, to look for buyers.

According to Carney, “This is not a short-term proposition. If someone shows up with stupid money, I have to listen to it. But my history is I’m not a quick-turn guy. I’ve never done that.” He also described the company as a standalone player

Even though the company has good cash flows and well-known market position, it still has not found a suitable suitor in the past three years. Investors should not think of Brocade as a slam dunk pre-takeover buy, but as just a firm with ongoing operations.

Financial Metrics

Let’s consider business-oriented technology firms by ordering them by market cap:

Ticker Company Market Cap ($Millions) P/E P/S P/B P/FCF D/E Growth Next 5 Years
IBM International Business Machines Corp. (NYSE:IBM) 231,319 14.74 2.21 10.74 19.44 1.56 9.9%
CSCO Cisco Systems 109,477 13.3 2.35 2.08 12.77 0.31 9.4%
EMC EMC 51,676 20.11 2.43 2.38 9.56 0.08 13.6%
HPQ Hewlett-Packard 33,138 NA 0.28 1.49 5.66 1.27 2.2%
JNPR Juniper Networks 10,972 60.8 2.52 1.55 33.18 0.14 13.3%
PANW Palo Alto Networks 3,826 NA 13.47 16.25 59.79 NA 50.0%
RVBD Riverbed 2,915 45.1 3.63 3.91 13.03 NA 20.9%
BRCD Brocade 2,600 13.9 1.16 1.17 5.02 0.27 9.8%

The top four companies on this list are big enough that they have historically engaged in many acquisitions, or could do so in the future. This is a knock against them as buy candidates. Hewlett-Packard and IBM have D/E ratios over one, which indicates that they are funded more by liabilities than by ownership. This is the rule of thumb which many value investors use to avoid companies with high leverage. These issues do not bode well for stock investors.

Another negative for HP is the recent ruling that has been denied a court order to depose former workers who quit to work at General Motors Company (NYSE:GM)’s new tech facility in Austin, Texas. In December, HP demanded answers from former employees about a planned “mass exodus” of 18 workers to the new GM facility.

Among the smaller companies, Brocade is very attractive. It trades near the accounting value of its assets (P/B ratio of 1.17), which is a steal for tech companies. It has a low level of debt, a reasonable P/E ratio, and it is small enough to attract “stupid money” from potential acquirers. Brocade is a good buy candidate for business-oriented tech firms.

The article Consumer & Business Computing/IT: A Perplexing World For Investors originally appeared on Fool.com and is written by Bill Edson.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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