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On March 9th, we sent a note to our clients a note entitled, “Eye on Value: Companies Trading at Discount to Cash”.  Since that time the screen in aggregate has returned ~34%, with Eastman Kodak being the top performer at +~94%. 

Not surprisingly given the move in the market over that period, every stock in the screen registered a positive return.  To quote Keith indirectly, our screen was either good, or lucky, as it outperformed the market by over 1,000 basis points.

We ran a new screen today, which we have called, “Tech Spec”.  Our Head of Technology research, Rebecca Runkle, wrote today in her morning piece, “M&A is what matters now.”  In effect, she is looking at the IBM / Sun deal as an early indicator of the re-emergence of tech M&A.  While Rebecca would obviously offer a more nuanced view of what company is next to be taken out, probably focusing on the franchise value of the company and such; we macro guys are simple folk.

As a result, I put together a tech spec screen based on the following parameters: cheap, good balance sheet, and market capitalization south of $1.0BN.  Since tech is working and M&A in tech is likely to pick up on a y-o-y basis, especially since, as Rebecca also wrote, “bid-ask spreads have already collapsed (0.9 TTM sales versus 1.9 a year ago, according to The 451 Group)”, this seems like the good area to look for some beta and to play the potential thematic increase in technology M&A.

According to Capital IQ, the group on average trades at less than 4.0x EV/EBITDA, less than 1.0 FV / Sales, and all the companies have net cash balance sheets.  Value investor’s values, to be sure. Incidentally, all of these companies fell under Capital IQ’s technology classification. 

Happy hunting!

Daryl G. Jones
Managing Director

Tech Spec: Screening for Tech M&A Candidates - tech29