If you're an active investor who monitors investment screens
with great frequency, then you have ample reason to look forward to
Monday mornings again. This is when major deals are often
announced, and if history is any guide, then we may be on the cusp
of solid upturn in deal-making activity.
Just this past week,
Netlogic (Nasdaq: NETL)
Global Industries (Nasdaq: GLBL)
were snapped up for a collective $5 billion, on -- you guessed it
-- Monday morning (Sept. 12).
"Merger Mondays" could be a key theme in coming quarters, helping
give the broader stock market -- as well as savvy investors -- a
desperately-needed boost. Here's why…
It's no secret the
has slowed to a crawl. This slowdown is hitting all kinds of
companies. For instance,
Cisco Systems (Nasdaq: CSCO)
is expected to boost sales only 5% in fiscal (July) 2012. This is
the same projected growth rate for
Procter & Gamble (
. And for mighty
, the projected figure is even worse -- only 2%. In fact, analysts
expect very few large companies will post major sales gains in 2012
-- at least on an organic basis.
Yet it's crucial to remember that many top executives have a large
part of their compensation tied up in stock options. To get rich,
they need to find ways to boost sales (and profits). And if
internal growth at their companies is lacking, then deal-making can
help bring a boost. With so many companies sitting on so much cash
right now, and this cash earning very little interest, the itch to
make deals is quite strong.
Make no mistake, hundreds of companies are probably analyzing
potential deals right now. If the stars align, then a number of
deals could come to fruition. Yet for this to happen, companies
need a stable stock market first. Who wants to make an offer for a
when the target may fall even further in price in coming weeks? The
economy also needs to stay at least at a level of zero growth.
Negative growth (i.e. during a
) has a way of turning promising acquisitions into botched deals,
because hoped-for synergies and
gains may never materialize.
The good news is the market may have begun to stabilize -- the
S&P 500 rose or fell at least 2% on 10 occasions in August, but
has done so only three times so far in September. And as I've
mentioned before, the economy may not necessarily slip into
recession, as some have feared.
With this in mind, here are five stocks in particular that may "get
a bid" by the end of the year. They are all attractive in their own
right and may still appreciate nicely even if a suitor never
A pair of chip stocks
Broadcom's (Nasdaq: BRCM)
move to acquire networking chip-maker NetLogic (for a hefty nine
times sales) has put a spotlight on rivals such as
Cavium Networks (Nasdaq: CAVM)
EZChip Semiconductor (Nasdaq: EZCH)
. Both stocks spiked earlier in the week of Sept. 12 in hopes that
they'd get acquired as well.
The logic is clear. Deal-making in high-tech follows a predictable
pattern. A key niche player gets acquired and larger tech firms
quickly scramble to acquire all of the other key players to ensure
they have an equally competitive offering in said niche. I looked
at this dynamic last year with the data storage sector, and two of
the three companies I profiled were subsequently acquired. Smaller
names in the communications/networking chip sector to watch include
Vitesse Semiconductor (Nasdaq: VTSS)
TransSwitch (Nasdaq: TXCC)
A Best Buy?
Best Buy (
recently announced and acknowledged what many already suspected:
Sales are weak while consumers remain cautious. The same could be
said for rivals
Conn's (Nasdaq: CONN)
, so an acquisition for any of these smaller players would help
and buying power, while taking out some competition. The logic is
especially clear in the case of RadioShack, which has a
complementary approach to retailing by focusing on small stores in
strip malls compared with Best Buy's big-box stores.
After losing roughly $8 billion in
in the past 52 weeks (and the stock back at levels seen in the late
1990s), Best Buy's management is under the gun to make bolder
moves. Best Buy's $2 billion cash balance could easily absorb
RadioShack's $1.25 billion current market valuation, even allowing
for a solid 30% to 40% premium to the current price.
Real estate gets healthier
Investors should brace for more deal-making in the
sector, which experienced major trauma in the financial crisis of
2008 but is far healthier now. Back then, a lot of real-estate
firms were caught with too much debt and quickly-falling
to support that debt, while major properties saw a spike in vacancy
A great example is
iStar Financial (SFI)
, which saw its
plunge from $50 in 2007 to below $2 by early 2009. I discussed the
real-estate lending firm's woes
in great detail
last fall. Shares have risen about 20% since then, but remain
vastly undervalued. As a result, there's a big chance a larger
real-estate player may swoop in and pick up the company while it's
selling on the cheap.
Importantly, iStar has cleaned up its
, retiring nearly $1 billion in debt in the most recent quarter.
With concerns off the table that a weak economy would trigger fresh
bankruptcy possibilities, investors can again focus on the value of
iStar's financial assets. The company carries roughly $8.2 billion
in assets, and after liabilities are deducted, still carries $1.7
billion in equity. These numbers already account for any distress
iStar may be seeing among its properties and loans to other
Meanwhile, the whole company is being valued for just $625 million
by investors. The sharp disconnect has led iStar to buy back stock
(a $65 million new buyback program replaced one that was recently
completed). A larger player could potentially come in and
offer a 30% premium to the current share price and still get
iStar's assets at a sharp discount to their real worth.
Risk to consider:
These specific companies may not get a
offer and instead may find their rivals in play. This is why it
pays to look at all of the players in a sector and determine which
might provide the most upside for any buyer.
Action to Take -->
You should never buy a stock simply in hopes it will get acquired,
but instead view it as just another positive
to your investment thesis. These stocks (with the exception of the
chip stocks noted above) are very inexpensive right now, which
makes them a bargain whether a suitor emerges or not.
-- David Sterman
Disclosure: Neither David Sterman nor StreetAuthority, LLC hold
positions in any securities mentioned in this article.