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How to Find the Most Promising Takeover Targets
By Jeff Opdyke, Editor of The Sovereign Individual Dear Sovereign Investor Subscriber,
Most investors think the only way to score big gains in the stock market in a short period of time is to take a gamble with speculative stocks or options. But that's not true.
One of quickest ways to earn a huge return on your investment is to find appealing takeover targets. Once a deal is announced, the stock of the firm being acquired tends to move much higher.
Now is a good time to start looking for potential takeover candidates – although merger and acquisition (M&A) activity has been fairly weak so far this year, I expect that trend to change.
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The recession in Europe, economic slowdown in China and the possibility of a fiscal cliff in the U.S. have created a very uncertain environment. So, it's easy to understand why corporations continue to hold onto an unprecedented amount of cash. Non-financial U.S. corporations now have about $1.74 trillion in liquid assets on their balance sheets, 74% more than they had a decade ago.
But once these temporary issues start to clear up, these corporations will start to put that cash to work. That could unleash a boom in M&A activity, as many big corporations use their cash to acquire fast-growing companies.
As some of the most likely takeover targets, baby multinationals are set to benefit from this coming M&A boom.
Takeover Premiums: The Icing on the Cake I've mentioned before that baby multinationals, small U.S. and Canadian companies that generate most of their revenues overseas, offer a tremendous investment opportunity because they're exploiting the rapid growth taking place in international markets. But there is another factor to consider: some of these companies are also prime takeover targets.
As companies in the U.S. increasingly look for growth, they've been snapping up companies with exposure to overseas markets where the real growth is happening. According to a recent study from the consulting firm KPMG, U.S.-based companies were the most active in completing mergers and acquisitions with emerging market companies in the first half of 2012.
Buying those foreign companies is one way to get exposure to faster growing markets, but large domestic companies have found an easier way to do it. Instead of acquiring a foreign firm, many big U.S. companies are buying smaller domestic companies that already generate most of their sales overseas. It's an easier transaction because the acquirer is dealing with a known regulatory/legal system instead of having to navigate through foreign rules and regulations.
This is important for you, as an investor, because acquirers tend to pay more than market price. If you buy the target before a bid is made, you can make some very nice gains in a short period of time. Let me give you an example: Three weeks ago, I recommended that my Global Growth Strategist subscribers buy Pure Energy Services, a small Canadian company operating in the oilfield-services industry. Here's what I told my subscribers when I first recommended the stock: "A takeover is a possibility as larger oilfield-services companies see the benefit in grabbing smaller players with a profitable footprint in the industry in both the U.S. and Canada." Last week, we sold the shares for a gain of 50%, after a large U.S. multinational swooped in and agreed to pay a big premium to acquire Pure Energy Services.
How to Find the Next Takeover Target Although I never buy or recommend stocks based solely on takeover possibilities, finding good takeover candidates can be extremely rewarding. If you do a good job of picking a potential target, the premium the acquirer pays will flow straight into your pocket.
So how do you find those targets? There are three main factors to consider.
First, you should focus on small U.S. and Canadian companies that generate most of their sales abroad. Their exposure to faster-growing markets makes them good targets for bigger corporations. Those are the kinds of companies around which I've built my Global Growth Strategist advisory service.
Second, you want to find companies that are operating in high-growth areas. In most cases, this means companies that have a healthy exposure to emerging market consumers.
Sometimes, however, it means companies that are operating in an industry that's experiencing above-average growth. That's the case of Pure Energy Services. Although it generates most of its sales in Canada, the company is playing a key role in the shale-oil industry, where tremendous growth is taking place.
Pure Energy Services produces highly specialized equipments used by big oil companies to limit emissions into the air and prevent leaks into nearby groundwater supplies. Companies operating natural gas wells have no choice but to comply with Environmental Protection Agency regulations, and that's what's creating growing demand for Pure Energy Services products.
Finally, you should look for companies that are cheap. Acquirers are always looking for bargains. In order to get ahead of them, you will have to do the same.
When I recommended Pure Energy, for example, it was trading for just 7.25 times its expected 2012 earnings. That's a very low price to pay for a company whose earnings are expected to grow at a rate well north of 20% next year.
If you look at major U.S. exchanges, you will find thousands of small domestic companies generating more than half of their sales abroad. With these baby multinationals, you will not only get exposure to strong overseas growth, but also the possibility of pocketing a big takeover premium.
Until next time, stay Sovereign…
Jeff D. Opdyke
P.S. Baby multinationals, with their ties to booming emerging market growth, offer incredible profit potential for us as investors. Right now, I've found one company in particular that is poised to generate historic growth. An investment in this company today could be like owning Wal-Mart in the '80s or Microsoft in the '90s. To learn more about this incredible opportunity, click here for my latest video report.
Related Reading: Finding Explosive Growth in Tomorrow's Multinationals
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