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M&A Activity Hits 7-Year Peak: Next 3 Takeover Targets

Zacks Equity Research

Global mergers and acquisitions (M&A) activity has heated up considerably in 2014. Consolidated deal value as of Jun 26, 2014 has increased 75% year over year to $1.75 trillion, as per Thomson Reuters data. This marks the highest level since deal value reaching $2.28 trillion in 2007.

Have you been able to cash in on the strong trend by investing in any of the companies that got acquired? If not, you still have the opportunity to earn a huge acquisition premium by betting on stocks that are the next takeover targets.  

Before we suggest three such stocks that might get acquisition bids (according to rumors), let's see what is happening in the M&A space.

What Caused the M&A Spurt?

Analysts had predicted 2014 to be a year of M&A activity because of the presence of large amounts of cash on corporate balance sheets, favorable credit markets, low interest rates, and strength in the stock market. As internal growth remained elusive, mergers and acquisitions were the next best route to get bigger. As organic means remained elusive, mergers and acquisitions were the next best route to achieve growth.

Moreover, shareholders extended full support to big acquisitions in order to make their company gain market share amid the rampant consolidation. As per Reuters, shares of both the buyer and seller companies rose significantly following any merger and acquisition announcement.

Remarkable Deals of 1H-2014

Some of the most notable deals include Facebook, Inc’s (FB) $19.0 billion buyout of WhatsApp and Actavis plc’s (ACT) acquisition of Forest Laboratories for $25.0 billion. Further, Medtronic, Inc. (MDT), the world’s largest medical devices maker, acquired its Irish rival Covidien Public Limited Company for $42.9 billion.

The telecom industry also witnessed two mega bids -– Comcast Corp.’s ((CMCSA) $45.0 billion offer for rival Time Warner Cable Inc. (TWC) and AT&T, Inc.’s (T) $48.5 billion bid for DIRECTV.  Notably, both the deals have hit regulatory hurdles.

Further, Google Inc. (GOOG) and Apple Inc. (AAPL) have been on acquiring spree. These two tech giants have primarily acquired lucrative start ups.

Overseas, Holcim of Switzerland and Lafarge of France merged to create the one of the world's biggest cement production company.
Mega Speculations

One of this year’s mega speculations is Apple’s rumored acquisition of Tesla Motors, Inc. (TSLA). The rumors resulted from a report by The San Francisco Chronicle that Apple’s mergers and acquisition chief, Adrian Perica, had a meeting with Tesla CEO Elon Musk in Cupertino, CA, in the spring of 2013.

Speculations are also rife about a merger between the third and fourth largest mobile network operators in the U.S -- Sprint Corp. (S) and T-Mobile US, Inc. (TMUS).

Unsuccessful Mega Proposals  

The mega failure so far this year is the falling apart of the deal between Pfizer (PFE) and AstraZeneca (AZN). Pfizer had offered $117 billion to takeover its British rival. However, AstraZeneca rejected the grossly discounted bid. AstraZeneca also raised certain concerns regarding the transaction structure and risks related to the proposed inversion structure (Pfizer’s intention to redomicile to the UK for tax purposes).

Two other pharma companies, Valeant Pharmaceuticals and botox maker Allergan (AGN), are also stuck in a similar situation as Allergan keep thwarting Valeant’s $53 billion acquisition proposal.

3 Potential Takeover Targets

Analysts remain confident of continued strong M&A activity in the second half of the year. So investing in the prospective takeover targets could offer you a handsome return.  

Based on market rumors, we have zeroed in on 3 stocks that stand a chance of receiving at least one tender offer in the upcoming days. Moreover, we have selected those that have a solid earnings run over the trailing four quarters and a favorable Zacks Rank. Even if these stocks do not offer a takeover gain, their earrings strength and favorable Zacks Rank should translate into decent price appreciation.

Citrix Systems, Inc. (CTXS): This Zacks Rank #1 (Strong Buy) stock is a business software and services company based in Fort Lauderdale, FL. The company is working on three broad fast growing markets namely Desktop virtualization, Cloud infrastructure and networking, and Collaboration and sharing. The company reported revenues of nearly $3 billion in 2013 and is confident of another 8%-10% increase in revenues in 2014. The company has beaten the Zacks Consensus Estimate in the last four quarters by an average of 13.6%.

Market speculates Citrix as an attractive acquisition target for any tech company that is looking for opportunities to expand its operations in the lucrative arena of Desktop virtualization and Cloud computing.

Alaska Air Group, Inc. (ALK): Based in Seattle, WA, this regional airlines company boasts a good West Coast route network and has a fuel efficient fleet. Moreover, this Zacks Rank #2 (Buy) stock has displayed high returns and profitability for some time now. The company has beaten the Zacks Consensus Estimate in the trailing four quarters by an average of 4.3%.

All these positive factors make it an interesting acquisition target for Delta Air Lines Inc. (DAL), which is trying to increase its presence on the West Coast. Speculations about a deal between the two airline companies having been doing the rounds for a sustained period.

Devon Energy Corporation (DVN): Recently, markets have started buzzing with the rumor of Devon Energy being acquired by Chevron Corp. (CVX). We believe that this is seemingly huge but definitely not impossible, with widespread consolidations taking place in the oil and natural gas sector. We have to wait and see how credible these rumors prove to be in the coming days.

Nevertheless, Devon Energy -- with its diversified portfolio, mostly including unconventional sources -- has significant long-term growth potential. The company has shown capital discipline by rationally allocating resources to projects that are vital for its future growth and trying to live within generated cash flows. Devon’s near-term focus is on the oil and liquids-rich opportunities that exist within its balanced portfolio of properties. The company’s focus on E&P activities will help boost liquid production in the future.

This was well reflected in the company’s strong financial performance. This Zacks Rank #3 (Hold) stock has beaten the Zacks Consensus Estimate in the trailing four quarters by an average of 11.3%.

It’s a Safe Play

Don’t wait to pull the trigger -- these stocks should not disappoint even if they don’t get takeover bids. Actually, their favorable Zacks Rank is an indicator of their decent performance in the near term, and the takeover potential may add a handsome bonus to your return.Read the Full Research Report on FB
Read the Full Research Report on ACT
Read the Full Research Report on MDT
Read the Full Research Report on CMCSA
Read the Full Research Report on TWC
Read the Full Research Report on T
Read the Full Research Report on AAPL
Read the Full Research Report on GOOG
Read the Full Research Report on TSLA
Read the Full Research Report on S
Read the Full Research Report on TMUS
Read the Full Research Report on PFE
Read the Full Research Report on ALK
Read the Full Research Report on DVN
Read the Full Research Report on
Read the Full Research Report on CTXS

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