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Takeover Targets: 3 Steps To Finding Them & 3 Stocks For Any Portfolio
by Louis Basenese, Advisory Panelist
Senior Analyst, The Oxford Club
Wednesday, May 6, 2009: Issue #991
I promise. Alexander Green and I are not in cahoots about the coming boom in corporate takeovers…
We both researched the possibility separately. Unprompted, I might add. And yet, armed with different evidence, we arrived at the same conclusion.
If you ask me, such a convergence of analysis in a narrow space of time shouldn’t be ignored. So today, let’s move on from why a takeover boom is imminent and focus exclusively on three takeover targets you can profit from…
Identifying The Market’s Next Takeover Targets
The task of identifying the market’s next takeover targets can be daunting. Literally thousands of potential targets exist, which is probably why most investors liken it to a crapshoot and in turn, shun such a strategy altogether.
But that’s a monumental mistake!
They’re passing up easy double-digit profits. Historical takeover premiums (the amount paid over the current share price for a target company) average 22%, according to a study in The Journal of Finance.
And that’s just the averages.
It’s common for many deal premiums to reach into the high double digits and even triple digits.
Investing in Takeover Targets – 3 Steps to Improving Your Odds
By following three simple steps when investing in takeover targets, we can dramatically improve our odds of success…
- Go where there is consolidation. Consolidation trends are a powerful predictive tool because they tend to persist. Think about it. When your biggest competitor goes out and doubles in size overnight, there’s only one way to respond – find a suitable acquisition of your own to remain competitive. Thus, by focusing on those industries and sectors undergoing the most rapid consolidation, we can isolate high probability targets.
- Focus on companies with valuable (and undervalued) assets. Whether it’s a new drug, a mammoth oil discovery, key market share, distribution channels, or a few promising patents, the real reason a company is acquired is because it owns a particular asset of value to the acquirer. Only invest in companies with such “must have” assets. And to reduce risk even further, I suggest buying clearly undervalued companies – ones trading at or near cash levels on the balance sheet. (Yes, they do exist.)
- Insist on improving fundamentals. Understand that takeovers take time. In fact, acquiring companies might spend as much as nine months conducting due diligence. Yet, even then, there’s nothing stopping them from walking away from a deal (Microsoft and Yahoo! ring a bell?). I recommend buying an “insurance policy” to protect against such unprofitable break-ups. By that I mean, only buy companies with improving fundamentals – whether it’s strong earnings growth, new product launches, increasing market share, etc. That way, you stand to profit even if a takeover never materializes.
You’ll recall in my previous article about the imminent takeover boom, I singled out three sectors that fit the first criteria above – health care (specifically drug makers), energy and technology.
3 Takeover Targets to Add to Your Portfolio Today
For those unwilling to expend the effort to carry out the next two steps… or just eager to get going immediately, here are three takeover targets to consider adding to your portfolio today:
- Crucell NV (Nasdaq: CRXL): Merck and Schering Plough. Pfizer and Wyeth. Roche and Genentech. Now Gilead Sciences and CV Therapeutics. Crucell is likely next. It’s the largest independent vaccine maker, with products for treating influenza, childhood diseases and hepatitis B. Crucell’s PER.C6 cell line is its most valuable asset. The company already licenses out the technology to over 60 companies. And there’s no doubt management is accepting offers. In January, it was in friendly talks with Wyeth, before Pfizer swooped in and bought Wyeth and ended the discussions. Best of all, multiple suitors exist (Novartis, Sanofi-Aventis, Merck and eventually Pfizer) so a bidding war could unfold, which translates into greater profit potential for us.
- Anadarko Petroleum, Corp. (NYSE: APC): As oil tycoon T. Boone Pickens famously observed, it’s often cheaper to drill for oil on the floor of the New York Stock Exchange than in the ground. Andarko proves it, as its reserves currently trade for less than $10 per barrel. Throw in a recent deep-sea discovery off Brazil, minimal political risk (80% of assets are located in North America) and high-quality, relatively untapped and undervalued natural gas assets and the takeover case here is an cinch. A multi-billion dollar stock repurchase program provides downside protection, too.
- Lawson Software (Nasdaq: LWSN): The company is a quickly growing niche vendor of enterprise resource planning (ERP) software for medium-sized businesses. Tech heavyweights like Oracle, Cisco and Microsoft are in desperate need of new growth initiatives. They have little exposure to the middle-market. And they have the cash to afford to buy it. The $308 million in cash sitting on Lawson’s balance sheet reduces our risk and also represents a 32% instant rebate to any potential suitors.
Full disclosure: I have recommended all three of these companies to subscribers in recent months. And we’re sitting on gains of 8%, 25% and 59%, respectively, proving it pays to follow step 3 above.
So to echo Alex’s sentiments from Monday, if you haven’t added a handful of potential corporate takeover targets to your portfolio, what are you waiting for? The opportunities and potential profits will be historic.
Good investing,
Lou Basenese
Editor’s Note: If you’re looking for the hottest and most potentially profitable takeover targets, consider The Takeover Trader. It puts these rockets in your hands long before the rest of the investment world knows about them. Find out more about Lou’s trading service, The Takeover Trader.
Today’s Investment U Crib Sheet
As Lou mentioned, both he and Alexander Green are incredibly excited about the opportunities in takeovers right now. Last month, Lou talked about the imminent takeover boom and the three hottest sectors right now in “The Coming Takeover Boom: 3 Sectors Ripe for Mergers & Acquisitions.”
On Monday, Alex talked about the conditions arising in corporate takeovers as “Once-In-A-Lifetime” Investment Opportunities. Driven by the fragile credit markets, companies with healthy cash reserves are looking around at their weakened competition and scooping up bargains.
In fact, our analysts are so encouraged about the takeover space that the principals have allowed us to offer a special pricing opportunity for new Takeover Trader subscribers.
To get access to Lou’s full list of takeover targets, consider signing up to The Takeover Trader.
- The Coming Takeover Boom: 3 Sectors Ripe for Mergers & Acquisitions
- Healthcare M&A Activity: Three Healthcare Small Caps Primed For Takeovers
- Corporate Takeovers: “Once-In-A-Lifetime” Investment Opportunities
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One Response to “Takeover Targets: 3 Steps To Finding Them & 3 Stocks For Any Portfolio”
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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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May 6th, 2009 at 1:05 pm
What I’ve also noticed is that if you purchase good companies at a big discount, it is just as likely to be bought out.
I also think there will be some consolidation in the oil industry just like what happened in pharma.
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