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Mergers and Acquisitions (Part 2): Two Stocks that Could Pop Any Minute Now
by Alexander Green, Chairman, Investment U; Investment Director, The Oxford Club
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, subscribers to the TakeOver Trader pocketed a double-digit gain when Bradley Pharmaceuticals (NYSE: BDY) 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
AG: 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?
LB: 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
AG: Can you name one or two stocks you’ve been buying lately where the takeover potential is particularly high?
LB: 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.
AG: Thanks, Lou.
LB: My pleasure.
Editor’s Note: Lou just released a special report that could significantly change the way you grow your money. His secret banking “Pass Code” is a monumental breakthrough for individual investors. And it’s catching on. Here’s how to use it to skim an extra $5,250 a month, starting tomorrow. Full report.
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.
- Look Who Just Showed Up to the Takeover Party
- Mergers Heat Up Between Haves, Have-Nots
- The Coming Takeover Boom: 3 Sectors Ripe for Mergers & Acquisitions
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Alexander Green is the Investment Director of The Oxford Club. A Wall Street veteran, he has over 20 years experience as a research analyst, investment advisor, financial writer and portfolio manager.
In addition to being the foremast expert on small-cap stocks, Louis is also well versed in special situations including IPOs, mergers and acquisitions, spinoffs and contrarian investments. His commentary has been featured in several media outlets, including MarketWatch. And he's also a top-rated speaker at financial conferences throughout the country. 
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