The Secret “Watch List” That Silicon Valley Doesn’t Want You to Have

11 | By Michael A. Robinson

I’m going to let you in on a Silicon Valley secret.

It’s a secret that the leaders of the U.S. tech sector guard very closely.

And I only know about it because I regularly talk to the senior industry executives as I make my rounds out here.

The leaders of the top tech players out here each maintain a “watch list” – in essence, a ranked short list of companies that they’d one day like to buy.

These “target companies” share a lot of qualities. They’re all well-run, offer great products, generate excellent cash flow, and are either very profitable now, or have the potential to be in the not-too-distant future.

These “short-list” companies are so good, in fact, that once they’re purchased, they immediately bolster (are “accretive” to) the suitor company’s bottom line.

If those characteristics sound familiar to you, it’s with good reason.

You see, those are essentially the qualities that I’ve repeatedly detailed for you in my list of Five Wealth-Building Rules for high-tech investing.

And today I’m going to show you some great examples of “watch-list” companies that turned into mega-deal buyouts – and demonstrate how you can set up your portfolio to grab a share of these tech-sector windfalls.

And the profits are huge: One recent deal actually netted investors a single-day windfall of 36%….

Cashing In

Make no mistake: The so-called “mergers-and-acquisitions (M&A) market is white-hot. As I related in our chat on Tuesday, U.S. companies are awash in cash … tens of billions of dollars, in fact.

That gives tech-sector CEOs a lot of dealmaking ammo. And they’re using it.

So far this year, worldwide dealmaking has reached $114.6 billion, a new report from Thomson Reuters says.

Software, computers and peripherals, and electronics accounted for roughly two-thirds of global M&A, an increase of 50% from last year. Eight of the Top 10 announced technology deals involve United States targets. And U.S. deals accounted for 62% of all tech-sector activity, the report said.

And dealmaking is just as hot in the Big Pharma/biotech sectors.

In a brand-new mid-year review by EvaluatePharma’s EP Vantage, there was $29 billion worth of deals in the first half of 2013 – which means that dealmaking in this sector is on track for its best year since 2010.

So CEOs view today’s markets as “target-rich” environments.

And there’s no reason you shouldn’t ride along and pocket some hefty gains, too.

Let’s look at some recent deals.

On Labor Day, Microsoft Corp. (NasdaqGS: MSFT) said it will buy the devices and services business from Nokia Corp. (NYSE: NOK) for $5.2 billion plus $2.2 billion in licensing fees.

With $60 billion in cash, an already-announced “reorganization” and CEO Steven A. Ballmer’s recent retirement announcement, it was clear that Microsoft was on the hunt.

And the Nokia deal ended up being the quintessential windfall buyout for the mobile-phonemaker’s shareholders.

On Friday, Aug. 30, the day before the deal was announced, Nokia shares closed at $3.90 each.

By the time the stock-market closed on Tuesday, Sept. 3 – the first trading day after the Labor Day break – Nokia was at $5.12 a share.

That represented a one-day pop of 36%. And it was just the start.

In the first two weeks of trading after the deal, Nokia had zoomed 64.3%.

The deal makes a lot of sense for two key reasons.

First, because Nokia CEO Stephen Elop is a former Microsoft executive, it brings back into the fold an experienced manager who can be viewed as one of the leading candidates to succeed Ballmer.

Second, it represents a bold move that – if executed correctly – will finally place Microsoft directly into the mobile arena. This is an area in which the world’s dominant software firm had become a non-factor, which is a dangerous place to be now that mobile devices are outselling PCs by a commanding margin of 5-to-1.

It’s almost as if Microsoft had torn a page out of the playbook of rival Google Corp. (NasdaqGS: GOOG). With its Android operating system, Google has become the world’s dominant mobile firm. A recent report by market research firm IDC says Google accounted for 79.4% of global smart phone shipments last quarter.

Then again, like Microsoft, Google made a huge bet on the hardware end of the market. Two years ago, it agreed to buy Motorola Mobility for $12.5 billion.

Motorola had served as a main platform for Android but Google wanted control over at least one physical device. In the long run, Google believed it would be faster, better and cheaper to buy a smartphone company than it would be to design and build its own device from scratch.

There’s a simple reason why big U.S. companies like Microsoft and Google play such an integral role in the M&A market.

They’re looking to “buy” growth.

When companies get as big as Microsoft – and with as much cash – it usually means that their business has “matured,” Wall Street speak for slowing growth.

And these deals means the acquiring firm needs to fill in the franchise by entering new markets or getting new products.

Take the recent example from networking giant Cisco Systems Inc. (NasdaqGS: CSCO).

Over the past 20 years, Cisco CEO John Chambers has engineered well over 100 acquisitions. Most of these were smaller deals involving companies few investors ever heard of.

But in July, Chambers said he would buy cybersecurity leader Sourcefire Inc. (NasdaqGS: FIRE) for $2.7 billion. On paper, it looks to be a great fit for Cisco.

Cisco’s business is all about the Web, a platform that remains under constant attack from hackers. Cisco wants to be able to offer its customers improved network security, and the Sourcefire buyout was the most cost-effective way to do that.

As we noted above, the same forces are at work in the biotech sector.

The chance to fill out its franchise appealed heavily to big drug firm Amgen Inc. (NasdaqGS: AMGN). It recently agreed to buy Onyx Pharmaceuticals Inc. (NasdaqGS: ONXX) for $10.4 billion, making it one the largest biotech M&A deals in history.

Amgen wanted to move into the market for direct sales of cancer drugs. It currently has a product that treats symptoms but not the underlying cancer itself. The deal put Onyx’s injectable drug Kyprolis in Amgen’s portfolio.

Whenever a deal of this size gets announced, I always hear some investors trying to guess who the next takeover target will be. Unfortunately, some investors will actually buy stocks on speculation the firm will get bought out.

That’s a mistake.

Never buy a stock solely on the hope that a buyout will take place. You have to believe in the prospects for the underlying company, too.

That way, if a deal never materializes – and you end up as a long-term “owner” of the stock – at least you’ll own a company with the potential for growth.

If you don’t believe in the company, you could get left holding a stock whose fundamentals are so weak that the stock could collapse – inflicting you with a painful loss.

That brings us to the next point – and it’s an important one: How can you profit from these deals?

Because there is a way to do this …

The Art of the Deal

If you want to boost your odds for getting in on some M&A deals – and the massive gains that follow – focus on buying high-quality tech firms, with a special emphasis on small-cap and mid-cap players.

And you can do that by following the five-rule system that I’ve established for you here at the Strategic Tech Investor.

Those rules are worth reviewing. They are:

  • Tech Wealth Rule No. 1: Great Companies Have Great Operations.
  • Tech Wealth Rule No. 2: Separate the Signals From The Noise.
  • Tech Wealth Rule No. 3: Ride The Unstoppable Trends.
  • Tech Wealth Rule No. 4: Focus On Growth.
  • Tech Wealth Rule No. 5: Target Stocks That Can Double Your Money.

I put these rules in action for you in March when I recommended Trius Therapeutics Inc. (Nasdaq:TSRX) here in these pages.

I loved this small-cap baby biotech because they were working on a fast-acting drug – tedizolid phosphate – for the treatment of serious infections, including Super Bugs like MRSA.

Super Bugs are deadly microbes that have mutated so many times over the years, they have become virtually immune to standard antibotics.

In the U.S. alone, MRSA kills an estimated 20,000 people a year – more than AIDS
And Trius was working and seeking approval on a new drug that showed great promise in defeating these “horror story” infections.

As it turned out, just last week in fact, Trius was acquired by Cubist Pharmaceuticals, Inc. (Nasdaq: CBST) for approximately $704 million. Had you bought Trius when I first recommended it, you would have pocketed a fast 95% gain.

So, it turns out that the single best way to put yourself in a position to capture M&A profits is to follow the system I’ve laid out here for you at Strategic Tech Investor.

And follow along with me each week. I’m working on some special reports to keep you informed of all the M&A activity that I feel you can benefit from right away.

Have a great weekend.

[Editor’s Note: Michael welcomes your comments. And your questions. He’s working on some very special reports … so please stay tuned. In the meantime, if you’d like to review an in-depth “how-to” overview of his five-rule strategy, click here to access his free tutorial.]

11 Responses to The Secret “Watch List” That Silicon Valley Doesn’t Want You to Have

  1. ed zuschlag says:

    how many times can we say thank you for your brilliance, willingness to ‘give without always charging’ and being as credible as you are. Certainly do apperciate your insights. Thanks, ed

  2. Charles Schmidt says:

    Your 5 rules sound great, but when are you going to flat out say buy these companies at this price. Everybody knows the companies you have mentioned that’s no secret.

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