Is Anyone Scouting DTLK Stock?
Dear reader, what have I been saying through all of 2016? Time and again, I’ve told you to keep an eye out for big mergers and acquisitions (M&A).
I’ve repeated this mantra over and over because mergers can offer shareholders monstrous returns in both the short and long terms. If you read this publication often, then you’ll surely know what I’m talking about.
Let me explain…
Central banks around the world are keeping interest rates at historic lows, with many even going so far as to create negative interest rates. Look at the yield on 10-year Japanese bonds, or two-year German notes for that matter.
Those countries aren’t paying interest on their debt like the rest of us do, because investors are paying them to hold cash. That’s the kind of topsy-turvy world we live in. Investors are terrified of the global economy right now, which makes it difficult to find a decent yield.
There is simply no appetite for risk, leaving global corporations in a tricky situation. Combined, they are sitting on $15.0 trillion in cash reserves, but investors are uneasy about those corporations spending that money on expansion or heavy investment. They can’t keep investing in short-term investments, because those instruments are now yielding negative interest rates, so the only answer is M&A.
Just look at what’s been in the news lately: Time Warner Inc (NYSE:TWX) and AT&T Inc. (NYSE:T) are negotiating what could be one of biggest mergers in history, QUALCOMM, Inc. (NASDAQ:QCOM) is buying NXP Semiconductors NV (NASDAQ:NXPI) for tens of billions of dollars (more on that later), and even Yahoo! Inc. (NASDAQ:YHOO) managed to find a buyer.
This past October saw a record level of deal-making, with nearly $500.0 billion worth of M&A activity in the U.S. alone. (Source: “October Smashes Merger Records as Companies Turn to Megadeals,” Bloomberg, October 31, 2016.)
That’s almost half a trillion dollars being spent in just one month!
Dear reader, I want you to get a piece of this action, which is why I’ve been hunting for companies that could be next on the auction block. For instance, regular readers of this web site will remember when we turned bullish on Rackspace Hosting, Inc. (NYSE:RAX).
We saw Rackspace’s potential as an acquisition target, and we were right.
Within weeks, Rackspace had sold at a double-digit premium, giving shareholders an immediate surge in their net worth. Owing to this success, we will keep an eye out for other companies that could soon be acquired. That’s why I’m keeping an eye on a small-cap stock called Datalink Corporation (NASDAQ:DTLK).
This data storage company is perfectly situated for a buyout in the next 12 months, something which seems to be common knowledge in the tech community.
I wouldn’t be surprised to see DTLK stock get picked up within the next 12 months, especially considering that its competitor, Brocade Communications Systems, Inc. (NASDAQ:BRCD), was recently acquired by Broadcom Ltd (NASDAQ:AVGO) for $5.9 billion. With Broadcom offering a 47% premium for Brocade shares, the deal was a no-brainer on both sides.
From everything we know about the data center and storage business, DTLK stock could also see double-digit gains if (and when) it becomes an acquisition target.
Why Would Anyone Buy a Data Storage Company?
Regular readers of this site are already familiar with the data center boom, but our new members deserve a little background.
Over the last few years, titans like Amazon.com, Inc. (NASDAQ:AMZN) and Microsoft Corporation (NASDAQ:MSFT) have raced to build data centers that house vast numbers of servers. These data centers are used to power services that Microsoft and Amazon can sell to corporate clients, something which turns out to be very lucrative.
Even though the industry is still in its early stages, there are billions of dollars up for grabs. The contracts for migrating corporate workbooks online to public and private clouds is enormously profitable, which is why we’ve remained bullish on both Microsoft and Amazon for a long time.
However, these companies have sacrificed efficiency in their race to crank out as many data centers as possible. Reports show that 90% of data centers operate below their peak efficiency levels, with more than half of operators rating themselves between 1 and 6 on a scale from 1 to 10. (Source: “IDG Survey: 90% of Data Centers Are Not Fully Optimized,” VMblog.com, October 25, 2016.)
Efficiency may not be a huge problem right now, but it will be once new sales start to dry up. Think about it: companies will have to trim costs to keep profits growing. This is where Datalink comes into the picture.
It sells products and services that will improve efficiency, making it invaluable to data center providers. It’s our estimation that one company or another will buy up Datalink to bring the technology in-house, much in the way that Broadcom bought Brocade. That solitary fact makes DTLK stock valuable.