The Israeli companies in IBM's sights

Shlomi Cohen

Morgan Stanley compiled a list of possible IBM acquisition targets. One third of the public companies on it are Israeli.

The great bull race, which began at the low point of the crisis, on March 10, 2009, completed its third year on Friday. As the new trading week starts, and with it the fourth year of the bull market, investors are asking themselves how much steam this rally has left, after boosting all the indices to double their levels of three years ago.

Again on March 10, but of the year 2000, the Nasdaq index hit an all-time peak of more than 5,000 points. Although it has led the latest three-year rally, headed by Apple (AAPL) just $31 at the height of the bubble, and today at $545 the index has only managed to reach 3,000 points. This was two weeks ago, and it has fallen back slightly since then.

Besides Apple, another technology gorilla that has left the bubble prices of 2000 far behind is IBM, which isn't much talked about, because it doesn't sell sexy products like Apple's, and it has never been headed by an extravert manager like Steve Jobs, but rather by hard-working types who shun the media. Big Blue has recently consolidated above $200, an all-time high, and more than double the price at which its share was traded at the height of the bubble.

One of IBM's most important strategies on its way to the all-time high was and remains acquisitions. Since 2005, it has spent about $25 billion buying 60 companies, 85% of it on software companies. To help reach the goal of $20 earnings per share in 2015 that its management recently set, IBM allocated a further $20 billion for acquisitions, of which only 10% has been spent so far.

On Friday, Morgan Stanley (MS) published a very interesting study, mapping the hundreds of public and private companies that could be acquisition targets for IBM. The basis of the study is the idea that IBM will buy companies that are technological leaders in their fields, in those niches in which IBM itself either has no presence, or is not a leading player, and where the acquisitions will fulfill its aim of becoming the category leader.

The Morgan Stanley analysts boiled the candidates down to a shortlist of 21 public companies and 40 private ones, all of them leaders in their fields. The astonishing thing is that of the 21 public companies, by happenstance and without the analysts themselves commenting on it, seven are Israeli. The list includes Check Point Software Technologies Ltd. (Nasdaq: CHKP), ClickSoftware Technologies Ltd. (Nasdaq: CKSW), NICE Systems Ltd. (Nasdaq: NICE; TASE: NICE), Verint Systems Inc. (Nasdaq: VRNT), Radware Ltd. (Nasdaq: RDWR), Amdocs Ltd. (NYSE: DOX), and Comverse Technology Inc. (Pink Sheets: CMVT).

As far as Check Point is concerned, it has already been said that founder and CEO Gild Shwed knows whom to call to name his price the minute he decides to sell. But I'm not sure that that is still relevant today, at a market cap of over $12 billion and a sales multiple of nearly 10. NICE and Amdocs are companies whose founders long ago left them, and where any fair acquisition bid will be welcomed. Comverse and its subsidiary Verint have been almost officially for sale for a long time.

As for Radware, its owners apparently rejected an IBM bid eighteen months ago, and in my view the impressive performance of its share recently, rising from a low of $19 to $35 in a matter of three months, stems from good business momentum. More and more people see it as an important security player, for PayPal, for example. The company has also signed an important OEM agreement with Juniper (JNPR), and rumor has it that another is on the way, with IBM.

ClickSoftware, small as it is, would fit IBM like a glove, but it would equally fit SAP or Oracle (ORCL), as a leader in optimization solutions for management of service crews of large companies in telephony, cable, electricity, water, gas, and so on. Of the Israeli companies on Morgan Stanley's list, it is the only one to have set a new all-time peak price last week, of nearly $12, but I don’t think that that was because it received an offer. I believe that in this case too it is a matter of good business momentum.

From today until Wednesday, ClickSoftware, alongside other Israeli companies, will participate in the major investors conference organized by Roth Capital Partners in California. Among the companies in my portfolio that will be there, besides ClickSoftware, are Nova Measuring Instruments Ltd. (Nasdaq:NVMI; TASE:NVMI), which reported orders of more than $12 million today, and Camtek Ltd. (Nasdaq: CAMT; TASE:CAMT), which is in a similar field. Both should express cautious optimism about a return to growth in the niche of measuring and inspection equipment for semiconductors in the second quarter as compared with the first.

Attunity (Nasdaq: ATTU), through CEO Shimon Alon, will explain at the conference how it is becoming part of the hot field of cloud computing and Big Data, with solutions for high speed transmission of heavy content to the cloud, and smart analysis of the huge waves of date stored every minute.

EZchip Semiconductor Ltd. (Nasdaq: EZCH; TASE:EZCH) founder and CEO Eli Fruchter will describe the potential just around the corner that has led investors to give his company the astonishing value of $1.2 billion.

Published by Globes [online], Israel business news - www.globes-online.com - on March 12, 2012

© Copyright of Globes Publisher Itonut (1983) Ltd. 2012

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