Given regulatory concerns and a declining business, we wouldn’t expect a huge premium. However, if shares fall further below the low end of our fair value estimate range ($19-$39 per share), a deal becomes even more likely, in our view.
As we see a secular shift in computing consumption from traditional PCs to smaller, mobile devices, we’re also seeing a shift in storage away from volatile-state hard drives (DRAM) to solid-state drives (SSDs). Even some of the traditional DRAM business is getting replaced by SSD due to its greater efficiency and lower power costs.
Nevertheless, both of the industry’s heavyweights, Seagate Technology PLC (NASDAQ:STX) and Western Digital Corp. (NASDAQ:WDC) trade at fairly reasonable forward earnings multiples, and both firms generate strong free cash flow (though capital allocation decisions differ between the two). Seagate prefers returning much of its excess free cash flow via repurchases and dividends, while Western Digital has maintained a higher cash balance and lower levels of leverage.
Seagate has been taken private in the past, but due to its less-leveraged balance sheet, Western Digital looks as though it’s a more likely candidate to be taken private, in our view. Samsung has an enormous stake in Seagate that could make it command a higher bid, while Western Digital does not have the same constraint.
Yet, we could see the two rivals consolidate as the outlook for the DRAM market continues to deteriorate and antitrust concerns dissipate. A deal would lead to tremendous cost savings and superior pricing power, resulting in a more profitable and valuable enterprise. Still, we’d wait to see if more downward pressure on shares of either company surfaces before becoming interested in the risk/reward without a buyout offer.
Deckers Outdoor Corp (NASDAQ:DECK)
In our last M&A roundup, we identified Deckers Outdoor Corp (NASDAQ:DECK) as a firm that could find a bid. The company reports its winter-quarter earnings this week, which could substantially change the fundamental outlook as we’ll be better able to see if the company’s 2011 weakness was product or weather related. If results are substantially better than expected, we imagine the chances of a bid would fall considerably. However, if results are just in line and not a complete disaster, we believe a bidder could emerge.
Everyone’s favorite retail acquirer, V.F. Corporation (NYSE:VFC), doesn’t necessarily look like a buyer, in our view. VF Corp runs its segments sort of like Berkshire does, allowing managers to work autonomously, while the firm uses its enormous buying power to lower cost of goods sold and its scale to lower production costs. Given Deckers’ major input is sheepskin, we’re not sure how much of an advantage Uggs can gain under the VF Corp umbrella. We think a private-equity buyer looks more likely at this time.
Best Buy Co., Inc. (NYSE:BBY)
Best Buy Co., Inc. (NYSE:BBY) has been a likely takeover candidate for some time, but we think odds of a deal getting done are reduced every time the stock rises—shares are up 40% year-to-date. Given the large amount of time that has passed since founder Richard Schulze announced he would bid and the fact that we haven’t yet seen a bid, we think financiers are unlikely to throw capital at this deal.
We at Valuentum can’t necessarily blame them, as Best Buy has seen its margins, free cash flow, and long-term business outlook decline considerably during the past few years. Still, this is one deal that we wouldn’t be surprised to see happen. We’ll be keeping a close eye on Best Buy.
The article With M&A Popping, More Deals Lie Ahead originally appeared on Fool.com and is written by RJ Towner.
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