M&A Boom Continues: 4 Takeover Targets to Watch for a Rally

Last week saw Janet Yellen, Chair of the Board of Governors of the Federal Reserve, keeping the benchmark interest rates undisturbed. While many companies, governments and investors were contemplating the after-effects of an interest rate rise during the period of uncertainty over the Federal Reserve’s move, a large section of corporate America was capitalizing on the low borrowing costs to facilitate their deals.

Mergers and acquisitions (M&A) have been on a rise since the beginning of 2015, with deals recently crossing the $3 trillion mark in September, according to data compiled by Thomson Reuters. With three more months left for the year to end, the figure is most likely to surpass the record $4.3 trillion tally notched in 2007.

What's Driving the M&A Frenzy?

The U.S. economy has, to a large extent, emerged from the 2008 financial crisis, with companies now depicting stable capital levels and a healthy cash position. However, these companies are struggling with stressed top lines due to a low-growth macroeconomic environment as well as a strengthening dollar which is making it difficult for companies to compete internationally.

As such, big players, with piles of idle cash sitting on their balance sheets, are looking for strategic merger opportunities to expand operations as well as enjoy material cost and revenue synergies.

A further delay in an interest rate hike, combined with the recently witnessed equity market sell-offs, makes a good platform for the deal-making frenzy in the remainder of 2015.

How Can the Trend Benefit Investors?

Investors can cash in on the strong M&A trend by investing in target companies, as these stocks generally rise on acquisition news. In fact, the Envivio, Inc., (ENVI) stock recently jumped over 113% in a single trading session following the announcement of its acquisition by Ericsson ERIC on Sep 10.

While this is an extreme case, putting money in potential acquisition targets will likely fetch handsome returns for investors.

4 Rumored Takeover Targets

At times, the market tells what numbers can’t predict. Thus, based on the market rumors, we have shortlisted four stocks that strongly stand a chance to receive a tender offer in the near term.

Nimble Storage, Inc. NMBL: Nimble Storage, a growing company in the attractive hybrid storage industry that is “ripe for consolidation,” is probably one of the most obvious takeover targets, according to analysts at Summit Partners. The company offers flash-optimized hybrid storage platform to providers of cloud-based, financial, education, healthcare, government and technology services.

While it has yet to turn profitable, it remains a top pick for companies like NetApp, Inc., EMC Corporation and Cisco Systems, Inc., given an envious portfolio of next-generation products and robust revenue growth. Notably, the company’s projected revenue growth for 2015 is 47.8%.

The stock’s current market capitalization is $1.92 billion, and the company is expected to win a takeover premium of 31.5%.

CyberArk Software, Ltd. CYBR: Recently upgraded to Zacks Rank #1 (Strong Buy), CyberArk, in the IT industry, is a provider of cyber security solutions. The demand for cyber security products is consistently rising, especially after the recent infamous attack on Apple Inc’s iOS app store, which forced the bellwether company to take serious cognizance of security issues.

CyberArk is likely to attract attention of big technology players which find it more plausible to acquire relatively smaller firms with promising products, rather than building the technology internally. In fact, International Business Machines IBM and FireEye FEYE are reportedly eyeing CyberArk’s acquisition.

CyberArk witnessed a 70% year-over-year surge in revenues during the second quarter of 2015, and is projected to grow 43% in 2015. It’s earnings per share is also projected to grow 6.3%. Moreover, the stock has surged over 67% in the past one year.

The stock’s current market capitalization is $1.58 billion.

Ariad Pharmaceuticals Inc. ARIA: Ariad is a biotechnology company focused on the discovery, development and commercialization of breakthrough treatments for cancer. The company is known for its only-approved product “Iclusig”, which is facing intense competition off late. Moreover, the company has a weak pipeline with only two candidates.

Nonetheless, Iclusig is Ariad’s crown jewel, given its strong revenue-generating power. The product is reportedly drawing attention from Baxalta Incorporated and Shire plc, as competition in the high-potential oncology market is heating up.

Notably, Ariad’s stock recently jumped 40% when a Bloomberg report suggested a likely takeover by Baxalta.

The stock’s current market capitalization is $1.36 billion; and the company is expected to win a takeover premium of 47.1%.

First Niagara Financial Group Inc. FNFG: First Niagara Financial is a regional bank that is struggling with profitability due to mounting expenses. Failure to capitalize on acquisition benefits has crippled this bank’s prospects, resulting in flat revenue growth over the past 5 quarters against a steady rise in expense. First Niagara is reportedly seeking advice from JPMorgan Chase & Co. for a potential divestiture.

Given its solid deposit base of $28 billion (as of Jun 30, 2015) and a well-diversified branch network of roughly 400 branches spread across the Mid Atlantic region, the company is likely to find suitors in The Toronto-Dominion Bank, Huntington Bancshares Inc. and New York Community Bancorp Inc., that share the company’s footprint. Moreover, the stock enjoys decent valuation ratios and low leverage, making it a potential takeover target.

The stock’s current market capitalization is $3.64 billion.

It’s a Gamble

The possibility of a buyout is high amid a strong M&A wave. However, investors should not take decision solely based on rumors. They should also see if the stock suits their investment goals and risk tolerance. Nonetheless, the markets are already uncertain, and taking some extra risk can at times pleasantly surprise. After all, No Risk No Gain.

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report >>

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
 
FIRST NIAGARA (FNFG): Free Stock Analysis Report
 
ERICSSON LM ADR (ERIC): Free Stock Analysis Report
 
ARIAD PHARMA (ARIA): Free Stock Analysis Report
 
CYBER-ARK SFTWR (CYBR): Free Stock Analysis Report
 
NIMBLE STORAGE (NMBL): Free Stock Analysis Report
 
INTL BUS MACH (IBM): Free Stock Analysis Report
 
FIREEYE INC (FEYE): Free Stock Analysis Report
 
To read this article on Zacks.com click here.
 
Zacks Investment Research