{"id":68596,"date":"2015-02-25T04:08:27","date_gmt":"2015-02-25T09:08:27","guid":{"rendered":"http:\/\/countingpips.com\/?p=68596"},"modified":"2015-02-25T07:48:03","modified_gmt":"2015-02-25T12:48:03","slug":"the-new-trend-ripping-through-the-tech-sector","status":"publish","type":"post","link":"https:\/\/www.investmacro.com\/forex\/2015\/02\/the-new-trend-ripping-through-the-tech-sector\/","title":{"rendered":"The New Trend Ripping Through the Tech Sector"},"content":{"rendered":"
February 25, 2015<\/div>
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By WallStreetDaily.com<\/span><\/a> \"Leveraged<\/p>\n

By Greg Miller<\/a>, Senior Technology Analyst<\/em><\/p>\n

Imagine you\u2019re the CEO of a struggling public company.<\/p>\n

Sales are tumbling\u2026 Profits are non-existent\u2026 You\u2019ve got little cash on hand\u2026 Debts are mounting\u2026 Shareholders are beating down your door, demanding to know how you\u2019re going to turn things around.<\/p>\n

Yet many of your options, like cost cuts and layoffs, aren\u2019t exactly ideal.<\/p>\n

So what do you do?<\/p>

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The answer doesn\u2019t always come from within. Oftentimes, like a white knight to the rescue, the savior can come from outside the company.<\/p>\n

Wall Street\u2019s Corporate \u201cFixers\u201d<\/h2>\n

I\u2019m talking about a leveraged buyout (LBO).<\/p>\n

Back in the 1980s, specialized Wall Street firms like Forstmann Little & Co. or Kohlberg Kravis Roberts & Co. were experts at buying inefficient public companies. They either broke them up and sold them for their parts, or fixed them and returned them to investors in a healthier state.<\/p>\n

Yet technology companies<\/a> were all but immune to the threats and rewards of these firms. The business risk was simply too high.<\/p>\n

Historically, LBO firms have preferred to buy more-mature companies with more-stable cash flows or predictable business cycles, so that the large debt loads associated with these kinds of buyouts could be more easily supported. Younger companies with higher risk tended to be left to venture capital firms.<\/p>\n

But the game is changing. And it\u2019s reaping massive rewards for tech investors who know where to find the profits\u2026<\/p>\n

LBO Firms Follow Tech Sector Money Trail<\/h2>\n

A new wave of tech buyouts has begun \u2013 one in which smaller firms with less-developed products are being taken private with large amounts of debt and relatively scant equity.<\/p>\n

This wave began as a mere ripple in the early 2000s, with a few high-profile tech buyouts. Back then, LBO firms preferred to buy companies that boasted many characteristics of their more-traditional targets \u2013 particularly stable cash flow.<\/p>\n

Examples include companies like SunGard Data, which had a tried-and-tested pipeline of financial services software, plus secure data backup technology. Similarly, Freescale Semiconductor<\/strong>\u00a0(FSL<\/a>) had a huge inventory of off-the-shelf computer chips used in multiple industries for several applications. This firm also entered private hands.<\/p>\n

And while these investments weren\u2019t the blockbusters that their \u201csponsors\u201d hoped for, it did prove that technology LBOs could be done profitably \u2013 and set the stage for more to come.<\/p>\n

One LBO that was<\/em> a blockbuster happened when Michael Dell successfully partnered with Silver Lake Partners to buy Seagate Technology, an investment that returned over 700%. Dell and Silver Lake teamed up again on a much larger buyout \u2013\u00a0his own Dell Computer. Dell says his company is now recovering in a way that wouldn\u2019t have been possible in the public market.<\/p>\n

Fueled by those successes, a flood of money has hit the tech LBO market\u2026<\/p>\n

Three Trends Firing up the LBO Market<\/h2>\n

The leader of this new movement is a company called Thoma Bravo. It\u2019s raised over $3.6 billion to direct to tech sector buyouts \u2013 and is said to be raising $1 billion more.<\/p>\n

With the addition of leverage, the firm has enough power to spend $15 billion-plus on technology companies! Indeed, it\u2019s already started. The firm has completed the purchase of Compuware Corp.<\/strong> (CPWR<\/a>) and has agreed to buy Riverbed Technology<\/strong> (RVBD<\/a>).<\/p>\n

So what\u2019s driving this new tech trend? A few things\u2026<\/p>\n

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  1. Go Private, Reap Profits:<\/strong> You know the deal with Wall Street. If something is possible, someone will do it. As I mentioned, LBO companies have proved that it\u2019s now possible to take tech firms private and not kill them. On the contrary, it can be quite profitable.<\/li>\n<\/ol>\n
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    1. Interest Rates: <\/strong>Even after a recent increase in yields, LBOs can be funded at rates that would have been unthinkable before the financial collapse of 2008. Low interest rates and relatively small risk premiums assigned to lower-rated debt are two compelling forces propelling the tech LBO market.<\/li>\n<\/ol>\n
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      1. The Power of Rarity:<\/strong> Like a vintage wine or rare coin, a shortage of other opportunities is pushing tech LBO demand higher. This is arguably the biggest trend. After three decades of buyouts, just about any traditional, cash-rich company that could have been bought has<\/em> been bought. It\u2019s reached the point where some have even seriously discussed whether a giant like Home Depot<\/strong> (HD<\/a>) might be taken private! In addition, LBO firms have seen their returns falling, with hedge funds also finding it tough to beat the market averages. So to chase returns, these firms have had to move into areas where they previously felt uncomfortable.<\/li>\n<\/ol>\n

        The Most Powerful Force Driving Tech Stocks Higher<\/h2>\n

        With these trends all in play, Thoma Bravo isn\u2019t alone in raising money for tech buyouts right now. And if these buyouts succeed, you bet that others will follow.<\/p>\n

        The question is: How do we take advantage?<\/p>\n

        Well, for a start, we\u2019ll leave the bulk of the risk to LBO firms. While there are opportunities, there are risks, too, as the number of tech firms available for investment will decline. That\u2019s because LBO firms will join private equity firms and other strategic buyers in taking companies off the public markets, or even buying companies before they go public at all!<\/p>\n

        Rather, the opportunity for us is two-fold.<\/p>\n

        Opportunity #1: Takeover Targets.<\/strong> When an LBO firm buys a tech company, it\u2019s already thinking about how to eventually sell it. Sometimes, it will sell to a strategic buyer, or another buyout firm. By identifying companies ripe for a takeover, savvy investors may be able to profit.<\/p>\n

        Opportunity #2: Institutional Interest.<\/strong> Most often, LBO firms are thinking about how to take their acquisitions public. This means they\u2019re buying companies that will prove highly attractive to heavy-hitting institutional investors. Institutions that find companies so<\/em> attractive, in fact, that they buy up tons of shares\u2026 and drive the stock price significantly higher.<\/p>\n

        How do I know this? Because I used to do it for a living in the heart of Wall Street!<\/p>\n

        Over my 20 years in the financial industry, I was an institutional investor, who directly helped finance some of the biggest LBOs in history. So I know precisely what factors these institutions are looking for in companies.<\/p>\n

        Ultimately, I\u2019m always on the hunt for companies that are poised to receive serious<\/em> attention from the kinds of institutions that buy enough to double, or even triple, the share price.<\/p>\n

        In fact, this strategy is a major cornerstone of my research advisory service. To learn more about this strategy, and how I incorporate several other indicators to pinpoint small-cap stocks destined to hit the stratosphere, click here<\/a>.<\/p>\n

        To living and investing in the future,<\/p>\n

        Greg Miller<\/p>\n

        The post The New Trend Ripping Through the Tech Sector<\/a> appeared first on Wall Street Daily<\/a>.<\/p>\n

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         <\/p>\n","protected":false},"excerpt":{"rendered":"

        By WallStreetDaily.com By Greg Miller, Senior Technology Analyst Imagine you\u2019re the CEO of a struggling public company. Sales are tumbling\u2026 Profits are non-existent\u2026 You\u2019ve got little cash on hand\u2026 Debts are mounting\u2026 Shareholders are beating down your door, demanding to know how you\u2019re going to turn things around. Yet many of your options, like cost […]<\/p>\n","protected":false},"author":3,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[],"tags":[],"class_list":["post-68596","post","type-post","status-publish","format-standard","hentry","no-post-thumbnail"],"_links":{"self":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/posts\/68596","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/users\/3"}],"replies":[{"embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/comments?post=68596"}],"version-history":[{"count":0,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/posts\/68596\/revisions"}],"wp:attachment":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/media?parent=68596"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/categories?post=68596"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/tags?post=68596"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}