Mergers and Acquisitions (Part 2): Two Stocks that Could Pop Any Minute Now

by Alexander Green, Chairman, Investment U
Monday, November 12, 2007: Issue #730

Editor’s Note: On Friday, Alexander Green interviewed our takeover specialist Louis Basenese, who pointed out that mergers and acquisitions activity is up more than 50% since this time last year. Cash-rich balance sheets and cheap money, he said, should continue to feed the frenzy.

If you missed Part 1 of this interview, you can find it here: Mergers and Acquisitons: Here’s How to Take Advantage of The Takeover Frenzy

Today, in Part 2, we’ll look at why these companies can be profitable investments all on their own, whether or not a buyout is ever proposed.

Plus, Lou reveals two of his top picks right now, where a takeover could be announced at any time.

Profiting from Mergers and Acquisitons

Alexander Green: Can you tell us about any recent success you’ve had lately, buying takeover candidates?

Louis Basenese: On Halloween, people who bought into Bradley Pharmaceuticals (NYSE: BDY) made a double digit gain when the company agreed to a $20 per share offer from Nycomed.

In terms of high-profile acquisitions, we hit the Alltel Corp. (NYSE: AT) deal right on the money for another quick double-digit gain.

I recommended picking up shares in mid-January because of the company’s “strong cash flow, healthy margins and little leverage.” Combine that with the company’s biggest asset – 11 million customers, mostly in markets with little competition – it was a no-brainer for private equity buyers.

Sure enough, a deal was announced May 21.

Prior to that, we also predicted Oracle’s purchase of Hyperion Solutions (Nasdaq: HYSL). And the results here were more impressive, as we locked in a healthy 63% gain in just over six months.

Knowing When to Pass on a Possible Takeover Stock

Alexander Green: Do you ever look at a company that you think is almost guaranteed to be bought out and nothing happens? And, if so, how do you decide it’s time to move on?

Louis Basenese: Sure. As I’ve told my subscribers countless times, takeovers take time. In most cases, you’re talking about multibillion-dollar purchases. So, naturally, they don’t happen overnight.

In fact, acquiring companies go to great lengths conducting due diligence, typically about 6 to 9 months. At the end, if the target company doesn’t meet strict selection criteria, it’s perfectly plausible for the acquiring company to walk away from the deal. And that’s why I build in an insurance policy into all my takeover picks…

I refuse to recommend any company that doesn’t boast improving fundamentals, whether it’s strong earnings growth, new product launches, increasing market share, etc. That way if a takeover doesn’t materialize, we still stand to profit.

In the end, even if a company is a “sure-thing” for a takeover, you cannot ignore the underlying fundamentals. And if they’re not strong, or about to improve drastically, I pass.

Two Stocks Poised For A Takeover

Alexander Green: Can you name one or two stocks you’ve been buying lately where the takeover potential is particularly high?

Louis Basenese: Right now, I think Ultra Petroleum Corp. (NYSE: UPL) is a compelling opportunity. It’s the lowest-cost natural gas producer in the Western Rockies.

The company recently sold its China drilling sites to SPC E&P (China) Pte Ltd. in a stock transaction worth $223 million. In my opinion, this divestiture eliminated a big hurdle to a deal. Namely the 6,000-mile divide that existed between the company’s operations. Now it’s a pure-play in the Western Rockies, boasting an unheard of cost structure and more than 30 years of drilling inventory.

I also like Epicor Software (Nasdaq: EPIC) because it would make a nice bolt-on for Oracle. And Larry Ellison has certainly not been shy about making acquisitions. He’s gobbled up 30 companies, worth more than $20 billion, in the past three years.

With a $5 billion war chest, he could easily swing a purchase of Epicor, with a market cap of just $800 million.

Alexander Green: Thanks, Lou.

Louis Basenese: My pleasure.

Today’s Investment U Crib Sheet

Last year, worldwide M&A deal volume hit $3.8 trillion. That’s enough to surpass the previous record of $3.4 trillion set in 2000. Interestingly enough, the bulk of the activity (almost 35%) happened in the fourth quarter.

This late-year strength has continued into 2007, with deal volume for the first nine months topping $3.6 trillion, a 50% increase compared to the same period a year-ago, according to Thomson Financial.

What’s driving this record M&A activity? And where are the best profit opportunities? Find out in Part 1 of Alex’s interview with Louis Basenese.

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