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August 21, 2012

Apple Buying Neflix? Don't Fall For This Wall Street Ruse

of Wall Street Daily
A recent article by MarketWatch’s Rex Crum floated the idea that Apple (Nasdaq: AAPL) should put its cash to work and buy Netflix (Nasdaq: NFLX).

His rationale couldn’t be more straightforward and plausible. Netflix possesses an extremely valuable asset – content – that could assist Apple with the highly anticipated launch of its television.

Or, as Jeffrey Sica of Sica Wealth Management said, “It’s no secret that in the world of Apple, the television is among their most important initiatives, and Netflix is a brilliant entry into the acquisition of the most coveted asset in entertainment, which is content.”

The fact that Netflix’s stock has cratered since last July – from about $300 per share to $63 – makes a takeover deal all the more attractive, according to Crum.

The only problem? Crum isn’t thinking about us – the everyday investors.

Just because a company possesses a valuable asset and its stock has been taken out to the woodshed doesn’t mean it’s an irresistible takeover target and, in turn, investment opportunity.

I don’t mean to single out Crum, though. Other analysts routinely apply the same (faulty) rationale. It’s happened recently with struggling electronics retailer, Best Buy (NYSE: BBY), and the best-known makeup company in the world, Avon (NYSE: AVP).

And although the trio of companies might be tempting acquisitions, it doesn’t exactly make them solid investment opportunities. You see, a potential suitor can ultimately turn its back on a purchase without losing anything except, perhaps, the time necessary to conduct due diligence. In other words, its downside is extremely limited.

The individual investor, however, has serious downside risk. If a deal never materializes, we’re stuck holding the stock of a fundamentally flawed business. And I think we can all agree that buying struggling businesses isn’t the path to stock market profits.

Instead, the smartest – and safest – way to speculate on takeover targets is to focus on companies we’d be willing to own whether or not a deal ever materializes. That way, we’re positioned to profit no matter what.
Jive Software (Nasdaq: JIVE) is a good example. Here’s why…

Let the Bidding Begin on JIVE

Palo Alto-based Jive provides software that helps employees interact more efficiently than with traditional email services alone. Think social networking for individual businesses.

Now, you might not think so, but demand for such services runs high. In fact, Forrester Research estimates the market for social enterprise applications was worth $900 million in 2011. But by 2016, Forrester predicts the market will increase by 611% to $6.4 billion.

The favorable demand is evident in Jive’s latest results, too. In the second quarter, sales increased 51% year-over-year. Plus, the company added another 40 new customers since the end of 2011. It now counts blue chips like Eli Lilly (NYSE: LLY), Nike (NYSE: NKE), Starbucks (Nasdaq: SBUX) and Verizon Communications(NYSE: VZ) as customers.

The growth isn’t going to stop anytime soon, either. Analysts expect sales to increase almost 50% in 2012. And through 2014, they predict the company will post a 157% boost in sales, according to Bloomberg data. That makes Jive the fastest-growing applications software company out of the 31 others in the industry.

Add it all up, and the company’s clearly an attractive standalone investment. Unlike Netflix, its takeover appeal only sweetens the opportunity. And make no mistake, Jive’s definitely attracting suitors.

I say that because Microsoft (Nasdaq: MSFT) made waves by acquiring Jive’s smaller competitor, Yammer, for $1.2 billion in late June. As Citigroup (NYSE: C) analyst, Walter Pritchard, said, “If Microsoft buys a company in the space, it forces Microsoft’s peers to look around to see what they should buy now.”

And as the fastest-growing company in the space, Jive should be at the top of the list. Like BMO Capital Markets analyst, Karl Keirstead, says, “I have no doubt that the CEO’s phone has been ringing from interested buyers.” Me, either.

So what companies can we expect to make a move?

Well, when we’re talking enterprise software, serial acquirer, Oracle (Nasdaq: ORCL), is definitely on the list of potential suitors. Germany’s SAP AG (NYSE: SAP) probably is, too. Especially since Co-Chief Executive, Jim Hagemann Snabe, recently said SAP’s looking for more acquisitions in the United States…

“Further acquisitions are possible,” said Snabe. “Our long-term growth should come two-thirds from our own reserves and one-third from acquisitions.”

With $30.7 billion and $4.4 billion in cash, respectively, both companies could easily afford Jive’s $964 million market cap. So let the bidding begin!

Bottom line: When it comes to speculating on takeover targets, don’t follow Wall Street’s advice. It doesn’t take the individual investor’s downside in mind. Instead, focus on companies like Jive, which warrant an investment even if a buyout never materializes.

Courtesy Louis Basenese at Wall Street Daily (EconMatters author archive here)

The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.

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