It's Apple v Microsoft in the technology boxing match of the century

International Business Times Video Link (click below):

IBT Video: its-apple-v-microsoft-technology-boxing-

match-century-

We have just witnessed the so-called boxing match of the century: Floyd Mayweather versus Manny Pacquiao in Las Vegas. Reputedly grossing over half a billion US dollars, this is a financial windfall of the likes never seen before in professional sport.

But the Mayweather v Pacquiao bout has its long-running mirror in the technology arena, with American technology giants Apple and Microsoft slugging it out for the crown of the most valuable company in the world since the dawn of the new millennium.

Apple slugs it out with Microsoft

Back in 2000, Microsoft held sway with its dominance over the PC software market thanks to the prevalence of the Windows operating system and its Office software suite, wearing the "Technology Most Valuable" belt with pride.

Figure 1. Global iPhone Volume Sales Remain Very Strong 

Source: Apple

But in 2015, it is Cupertino-based Apple that is the Floyd Mayweather of the tech world –wearing the crown for being the most valuable company in the world as it is worth over $750bn (£495.7bn, €674.2bn) and nearly twice the market size of Microsoft.

Recent Apple results have underlined the pre-dominance of the iPhone 6 and 6+ models, even taking reportedly a 25% market share of the Chinese smartphone market in the face of incredibly fierce domestic competition from handset makers Huawei, HTC and Xiaomi.

In fact, Apple sold more iPhone 6 handsets in China than in the US over the past three months. The 61.2 million iPhones sold globally over the second quarter (Figure 1) served to dish up outstanding financial results at Apple, beating the expectations of financial analysts by a wide margin.

Unlike during the technology bubble in 2000, "old" technology names such as Apple (US code: AAPL) and Microsoft (US code: MSFT) are today substantially cheaper than the overall US stock market. Adjusted for the cash on the balance sheets of tech titans Apple, Microsoft and Google, you pay an average of under 12 times earnings for these globally dominant tech names; in contrast, you pay a much more expensive 18 times earnings for the overall US stock market (Figure 2).

Figure 2. Apple, Microsoft & Google: Much Cheaper than the US Stock Market 

Source: Yahoo Finance. Note: Lower P/E ratio is cheaper

While Apple and Microsoft are cheap, they still offer solid prospective growth in both profits and dividends. The combination of cheap valuation and solid growth prospects in the technology sector could be a good reason to buy exposure. However, unless you have a stock market account that allows you to buy and sell US stocks, you may find it difficult to buy Apple or Microsoft shares directly.

Buying US tech stocks via a fund

In this case, buying a sterling-denominated exchange traded fund (ETF) or investment trust focused on US technology stocks may well be an easier option. These typically have substantial weightings in both Apple and Microsoft, given they are two of the largest stocks in the entire US stock market.

Five technology fund options are below (Figure 3), all with varying weightings in these two tech giants as well as the global internet and social media behemoths Google and Facebook.

Figure 3. UK-Listed Technology-Focused Exchange-Traded Funds,
Investment Trusts 

Source: Company Factsheets

Focus instead on UK technology stocks

Instead of buying tech giants from the other side of the Atlantic, you may instead want to focus on technology closer to home. In that case, there are a number of UK technology stocks listed on the London Stock Exchange.

Narrowing down our focus to the technology hardware space, there are few large-cap stocks left for us to buy, following the recent takeovers of UK technology stocks CSR (being acquired by US semiconductor maker Qualcomm) and Pace (being acquired by US set-top box maker Arris).

ARM Holdings (semiconductor design, code: ARM), Imagination Technologies (semiconductor chip maker eg for Apple, code: IMG) and IQE (semiconductors, code: IQE) are three that remain listed in the hardware space.

In the UK software space, there are the likes of Sage (small company software, code SGE), Micro Focus (business software, code MCRO) and Playtech (gaming software, code PTEC).

But, overall, the listed UK technology sector is getting smaller and smaller, with companies being swallowed up by larger US competitors. This trend may be a good additional reason to buy into medium-sized and smaller UK technology businesses, aside from the growth attractions in technology.

So there you have it, two ways to play the technology growth theme. You can go the US route, either buying the likes of Apple or Microsoft directly or by buying a US technology fund.

Or there is the UK route, selecting from an ever shorter list of listed UK technology stocks, but perhaps benefiting from their status as potential takeover targets in a global sector.

After Shell, BG, Nokia and Alcatel, ITV and Indivior could join the takeover trail

IB Times Video Link:

Edmund Shing: After Shell, BG, Nokia and Alcatel, ITV and Indivior could join the takeover trail

KPMG says the merger and acquisition boom is back in 2015. Certainly, company takeover activity has been hotting up on both sides of the Atlantic these past few months – just think of Shell swallowing up BG in oil and gas, Nokia merging with Alcatel-Lucent in technology and FedEx buying up fellow Dutch logistics group TNT Express.

Figure 1. What factor will drive deal activity in 2015? 

Source: KPMG 2015 M&A Outlook Survey Report

One of the main reasons for expecting more takeovers is the very high level of cash that large companies are holding, and the very low interest cost on company debt (Figure 1). With money burning a hole in corporate pockets, top executives want to go shopping for growth.

In trying to predict who could become the next takeover targets, we need to know the profiles of existing targets: which industries are seeing the greatest number of takeovers and takeover rumours, and what size of company is most likely to be susceptible to a takeover approach?

Technology, healthcare, media, insurance and oil and gas are ripe for consolidation

I see four industries as prime hunting grounds to search for potential takeover targets, given recent takeover and merger activity in recent months:

1. Technology: Nokia is merging with Alcatel-Lucent in telecoms equipment, while US set-top box maker Arris is buying UK set-top-box maker Pace for $2.1bn.
   
2. Healthcare: In generic drug making, Israeli global leader Teva has bid some $40bn in cash and shares for US generic drug rival Mylan. Novartis, the Swiss drug maker, has revealed recently that it is hunting for healthcare acquisition targets in the $2bn to $5bn range.
   
3. Media: AT&T's acquisition of DirectTV in the US and Liberty Global's purchase of Belgian media company De Vijver Media NV highlight the consolidation occurring in the US-dominated broadcast media industry, with media content becoming increasingly valuable to cable and TV distributors.
   
4. Insurance: Lloyd's of London insurers has been the focus for acquisition of late, with both Catlin and Brit Insurance bought up by larger North American insurers. We can also add the merger of close-end life assurer Friends Life with Aviva, highlighting the consolidation wave under way in insurance.

Interestingly, these same industries came top in the KPMG M&A survey too (Figure 2).

Figure 2. What factor will drive deal activity in 2015? 

Source: KPMG 2015 M&A Outlook  Survey Report

What size of company could be preferred for acquisition?

While the Shell-BG deal is huge buying up huge, mid-cap companies are generally more likely to become tasty bite-sized morsels for cash-rich mega cap rivals to buy up growth prospects, relatively easy to finance and without all the complications of combining two huge companies with wide-ranging and complicated operations.

Three potential UK mid-cap takeover targets

1 Indivior (Healthcare)

Indivior (UK code: INDV) is the former pharmaceutical division of cleaning products and food maker Reckitt Benckiser, spun off from Reckitt as an independent, UK-listed company at the end of 2014. Its principal focus is on medicines to treat drug dependency, most notably alcohol, heroin and cocaine addiction.

At a market capitalisation of £1.5bn, it is relatively small versus the UK industry giants GlaxoSmithKline, AstraZeneca and Shire. Furthermore, it remains substantially cheaper on a number of valuation ratios such as price/earnings than any of these larger drug companies. Potential acquirers could be larger US-based drug makers who already produce opioid addiction treatments – Actavis, Endo Health and Janssen Pharmaceuticals.

2 ITV (Media)

There has been a battle for broadcast media content globally in recent months, with persistent takeover rumours surrounding £11bn market capitalisation ITV (UK code: ITV). It has most recently popped up as a potential target for the likes of US cable operator giant Comcast, the largest company in the world by broadcasting and cable revenues.

These rumours have sent the TV share price, and thus valuation, rising substantially since November 2014, with ITV's jewel in the crown being its production arm ITV Studios, responsible for drama series such as Poldark.

3 Lancashire (Insurance)

Lancashire (UK code: LRE) provides "global specialty insurance", operating as a Lloyd's of London insurer like acquired competitors Catlin and Brit Insurance. Attractions include a low valuation, high profitability levels and a juicy dividend yield projected to be as high as 9.5% in the future.

Just like Catlin and Brit Insurance, Lancashire could be the next to fall prey to a US-based reinsurer looking to expand globally.

So these are three UK mid-cap gems that I like the look of from a fundamental basis, which could also become the subject of a share-price boosting takeover in the next few months.

Oil Takeover Targets – Who’s Next?

 Has a rush to buy up oil & gas companies just started? Royal Dutch Shell is set to become by far the largest FTSE 100 member by market capitalisation at 7.6% of the index (Figure 1), worth nearly £160 billion and 35% larger than the second-largest company HSBC, once it completes the £47 billion purchase of BG later this year. 

1. Royal Dutch Shell Worth 7.6% of FTSE 100 Post BG Deal

Source: Author, stockopedia.com

In the late 1990s, the oil price plunged to $10 per barrel and set off a wave of oil industry mega-mergers: Exxon with Mobil, Chevron with Texaco, BP with Amoco. Fast forward to April 2015, and once again the oil price has plunged, more than halving from $110 per barrel in July last year to just $50 by January this year.

Now we have a new oil & gas mega-merger, Royal Dutch Shell taking over BG (the gas-dominated exploration and production arm of the former British Gas). This is in fact the second big oil company merger announced in the past few months, following US oil services company Halliburton which announced a merger with rival Baker Hughes in November last year. 

Why is Shell Buying BG?

With this purchase of BG, which has been beset by fundamental problems for some time, Shell is buying access to oil and gas reserves in Brazil and Liquefied Natural Gas (LNG) capability. These assets allow Shell to grow their oil & gas reserve base (replacing oil and gas currently being produced) and to be a dominant player in the growing LNG market, alongside the state of Qatar. 

The basic idea is this: that the oil & gas-producing assets of BG are cheaper for Shell to buy in principle than developing new oil & gas fields and putting them into production – the so-called “replacement” cost. Why take the risk of developing new oil fields (which may not even produce as expected), when you can buy proven, producing oil & gas reserves off the shelf?

Who Else Could Be Looking To Buy Oil & Gas Assets?

While Shell has already chosen its prey, which other mega-oil companies could also be looking to buy up cheap oil & gas reserves? As the oil & gas market is global by nature, we have to look abroad for potential acquirers. 

In the US, ExxonMobil and ChevronTexaco are the two largest integrated oil companies with the financial muscle to do big deals. In Europe, Total of France and Statoil of Norway stand out as huge integrated oil companies that might find it easier and cheaper to buy up oil & gas reserves via acquisition of companies rather than by developing new oil & gas fields from scratch. 

Who could be next to succumb to oil merger mania? BP?

In the UK, there are both big and smaller potential acquisition targets in the Oil & Gas sector. In a previous IBT article I have highlighted the attractions of the ailing BP (hurt by the 2010 Gulf of Mexico Macondo disaster). 

BP could be an interesting target for the two US mega-oil companies Exxon and Chevron, given its huge asset base in the US/Alaska. I should note that BP has gained over 10% since I discussed it back in December last year, and BP’s market size is only 35% that of Exxon and 63% that of Chevron (Figure 2)…

2. BP Could Be a Target For US Giants Exxon, Chevron

Source: Bloomberg.com

Other Potential UK-Based Targets: Tullow, Premier Oil, EnQuest, Ithaca Energy

Otherwise, the oil exploration & production companies Tullow Oil (total company value: £5.2 billion; code TLW) and Premier Oil (total company value: £2.2 billion; code PMO) have both been cited as potential acquisition targets, and look cheap when comparing their total company value (the value of all shares + value of debt) to the number of barrels of oil they hold as Proven + Probable (2P) reserves in their developed oil fields (Figure 3). 

For instance, Premier Oil is currently valued at just $13 per barrel of 2P oil reserves following a drop of more than 50% in its share price from September 2014 to now (from 348p to 159p). Could an integrated oil giant swoop to acquire these now-cheap oil reserves?

 

3. Four Small/Mid-Cap Oil Targets? Valued at $10-22 Per Barrel of Oil Reserves

Source: Author, Company reports

Both Tullow Oil and Premier Oil have global oil & gas interests, spanning from West and North Africa to Pakistan and the Falkland Islands.

Closer to home, other acquisition targets could include the smaller, North Sea-focused oil exploration and production companies EnQuest (code ENQ, current share price 42p) and Ithaca Energy (code IAE; current share price 46.5p). Both of these companies also look like potentially cheap acquisitions for larger oil company predators, at values of only $6 and $14 respectively per barrel of oil held in their various North Sea oil fields, and benefit from the reduction in North Sea oil taxes in the latest UK Budget. 

There you have it: five UK-listed oil companies of varying sizes that could become tasty acquisition targets for global oil companies!

Edmund