Investors recently have heard about some big-time buyout announcements, including Warren Buffett’s purchase of H.J. Heinz (NYSE:HNZ) for $23 billion and Dell (NASDAQ:DELL) going private for a whopping $24.4 billion.
This could be a very bullish sign, as it signals that big corporations and private equity firms have cash to burn, as well as optimism that they will get a good price at current valuations.
So how can you benefit from this trend? Well, if you own a sought-after stock that is offered a nice premium over its current share price, then you get an instant pop. And while there’s no sure way to know who is going to bid for what, a little logic and research can put you in picks that are likely merger or acquisition candidates.
Consider the recent news that Office Depot (NYSE:ODP) and Office Max (NYSE:OMX) are debating a merger. That’s a no-brainer because the combined company still would be roughly one-fifth the size of heavyweight Staples (NASDAQ:SPLS), and there is hardly a lot of competition from upstart brick-and-mortar office supply companies. In fact, many investors have been hanging onto shares for a long time in anticipation of just such an event. Holders of ODP and OMX both were richly rewarded by a pop of more than 20% this morning.
So what other companies seem to have a buyout in their future? Here are a few ideas:
Green Mountain Coffee Roasters (NASDAQ:GMCR) made a big splash with its Keurig and K-Cup technology. But now GMCR has stiff competition from Starbucks (NASDAQ:SBUX) and its Verismo, Nestle (PINK:NSRGY) and its Dolce Gusto line of Nescafe products, and gadgets from Tassimo, Cuisinart and a host of others.
GMCR stock has crashed more than 60% from its 2011 peak of about $116 a share. While Starbucks, long the front-runner, might no longer be eager to buy Green Mountain now that it has launched the Verismo, GMCR still could be a buyout play. The K-Cup technology is pretty ubiquitous, and a company like Nestle could benefit big-time from that kind of distribution.
GMCR certainly is a risky proposition. The stock has lost about 8% in short order since its recent earnings trouble earlier in February. However, some analysts are bullish on the long-term as new strategies come on line.
Beam Inc. (NYSE:BEAM), a spirits purveyor, has been making headlines recently for an ill-advised (and eventually reversed) move to cut the alcohol content in its Maker’s Mark bourbon. But don’t believe the hype — it would take some serious missteps to damage the brand power at Beam with its lineup of Jim Beam bourbon, Courvoisier cognac and Sauza tequila.
Ever since conglomerate Fortune Brands split its disparate businesses into Beam and Fortune Brands Home & Security (NYSE:FBHS) in 2011, there has been speculation that the spinoff makes Beam ripe for acquisition.
And that’s logical, because like coffee the spirits and alcohol game is a highly consolidated one with a few big players. Global heavyweight Diageo (NYSE:DEO) recently has been gunning to acquire Cuervo tequila, but dropped its bid a few months ago. However, Beam has a tequila brand in Sauza that could be attractive to DEO.
Also consider the brewing space, which continues to get smaller. Anheuser-Busch InBev (NYSE:BUD) was formed in 2008 in a $52 billion mega-merger between the companies, and InBev now hopes to grow via a $21 billion takeover of Grupo Modelo (PINK:GPMCF).
Beam is no small fish, but with a market cap under $10 billion, it is a fraction of some of the bigger players in the alcohol space and could be a nice target.
Unlike coffee and alcohol, which are relatively easy to understand, Huntsman (NYSE:HUN) is a chemicals company that traffics in polymers and adhesives. The uses are pretty specific and pretty boring — including insulation for refrigerated vehicles — but Huntsman has a long history and more than $11 billion in annual revenue. That’s nothing to sneeze at.
What makes Huntsman a buyout candidate instead of just a boring chemicals stock? Well for one, the same industry-wide consolidation that is featured in the first three picks. Dow Chemical (NYSE:DOW) and DuPont (NYSE:DD) are both about 10 times the size. 3M (NYSE:MMM) is almost 17 times the size. There aren’t a lot of players out there, and all are much larger.
Furthermore, Huntsman has a history of being a buyout candidate. A troubled history, true, but a history nonetheless.
In 2008, Access Industries and Apollo Global Management (NYSE:APO) fought to buy Huntsman. Unfortunately, the big-time fight over a big-time buyout coincided with the financial crisis, so the court fight helped scuttle any takeover plans. But in 2012, rumors of a revived takeover began again in earnest. Bain Capital was reportedly interested. Other suitors are theoretically in the market for Huntsman, too.
That kind of buzz is a decent indicator, even if it’s not a sure thing. And if it never comes to pass? Well, you get a 2.8% dividend and a stock that is up 25% in the last 12 months. Not bad.
The small, unprofitable carrier is off more than 30% in the past 12 months and doesn’t have much to look forward to beyond a merger deal. But while speculative, an investment in Leap Wireless on the hopes of a different suitor — or even the MetroPCS/T-Mobile deal falling through — still might be worth making.
That’s because Leap’s biggest asset is wireless spectrum. The carrier known to most consumers through its Cricket brand reaches more than 130 million people in the U.S. Unfortunately, recent reports show that about 30% of its users are outside its operating area, and it only uses about 40% of its network bandwidth inside its geographic constraints.
Since it’s very unlikely that Leap will grow dramatically inside its boundaries or build out a bigger network to cover those beyond its current zoning, a well-crafted deal with a larger carrier could make a lot of sense.
A failed 2011 bid for T-Mobile by AT&T (NYSE:T) means that the big guys aren’t going to be likely buyers here. But if AT&T and Verizon (NYSE:VZ) are out, why not Sprint (NYSE:S)? Or if the T-Mobile deal crumbles again, why not either it or PCS?
Wireless bandwidth is in demand and the way of the future. Of course, there’s a big risk that competitors could just wait for LEAP to bleed itself dry and buy some of the parts … so tread lightly.
Steris (NYSE:STE) is a small-cap medical company that produces surgical products and anti-infection medication, among other things. It also has a small footprint in skin care products for consumers.
There is perhaps no industry more accustomed to big-time buyouts and mergers than medical products, biotech and pharma. Think back to 2009, when Pfizer (NYSE:PFE) paid a stunning $68 billion for rival Wyeth and sparked merger mania in Big Pharma. Think about the biotechs that are eagerly snapped up by larger healthcare companies for their product pipelines, such as GlaxoSmithKline‘s (NYSE:GSK) recent $3.6 billion buyout of Human Genome Sciences.
Steris is exactly the kind of company that healthcare giants could be gunning for. Maybe Johnson & Johnson (NYSE:JNJ) can use both the surgical products as well as Steris’ line of antiseptic alcohol hand rubs. Maybe a mid-cap like St. Jude Medical (NYSE:STJ) that already has a big OR presence could capitalize from a merger with STE. Or maybe one of the big guys like Merck (NYSE:MRK) or Pfizer has to continue its neverending quest to replace lost revenue due to patent expiration.
Also a plus: Steris is a stable company with a double-digit five-year growth rate, so an investment here isn’t as speculative as some of the others.
- Some caveats for the recent deal-making craze. (Dealbook via NYT)
- Is “Merger Monday” making a comeback? (InvestorPlace)
- A merger wave could also be coming for financials and will last through 2015. (American Banker)
Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at firstname.lastname@example.org or follow him on Twitter via @JeffReevesIP. As of this writing he did not own a position in any of the stocks named here.