How to Profit from Takeover Targets

by Investment U Research

Takeovers are one of the fastest ways to strike it rich on Wall Street. And the returns can be staggering.

OptionsXpress was an obscure online trading company once upon a time. If you weren’t an options-trading geek, you probably didn’t know much about it. However, once word spread about its takeover, the price exploded. In less than three months, investors saw a 1223% gain as speculators drove up its stock price.

Buyout targets can deliver strong or even exceptional returns – sometimes, in only a few days. And most investors never hear about them. But these gains aren’t just for the barons of Wall Street – nor should they be.

Anyone can pocket thousands of dollars in these transactions without doing anything more complicated than buying stocks.

You just need to be patient, and know what to look for…

Five Characteristics of a Takeover Target

Spotting and taking advantage of these opportunities may be the most difficult part about them. But companies that are takeover candidates have some elements in common.

It’s these similar fundamentals that can make it easier to find and profit from them:

Company Size – Small to mid-sized companies make the best targets for buyouts. It grows increasingly more difficult to take over big companies – there are few firms that can afford to. Large-cap firms are simply too big to be bought.

Cash Reserves – The best targets usually have large cash reserves. This cash is then used to pay down the large amount of debt that the acquirer generally takes on to finance the deal. In addition, these companies usually have low amounts of debt and lots of equity. These assets are the true “prize” of a takeover.

Ownership – Lots of inside ownership can help facilitate buyouts because management has an incentive to sell. In addition, when ownership is concentrated amongst a few large shareholders, getting the voting majorities needed to approve the transaction becomes much easier.

Valuation – When a target is priced at or near its tangible asset value per share, it becomes more attractive to potential acquirers. The closer a company is to its book value, the easier it is to break up and sell off parts at a profit if needed. A low price-to-earnings (P/E) ratio is a good indicator that a company is selling for less than its worth.

Performance – Surprisingly, buyout targets generally have poor recent performance. And the reason is this: If you are buying a company, it is much easier to turn around lackluster management and performance than it is to improve upon a top-performing firm. Something as simple as changing the “coach” can improve a companies “game.”

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