Executives at chip-equipment maker
Lam Research (Nasdaq:
pulled off a masterstroke this week. A decision to buy
Novellus Systems (Nasdaq:
has the makings of a "home run," according to Citigroup.
Why? Because the
may boost Lam's
earnings per share (
by 35% in 2012, and the $44 share purchase price is well below the
$60 target Novellus had reportedly been seeking. The fact that the
company settled for a 25% discount tells you it's a buyer's
And that's good news for investors. Those who can find companies
likely to be acquired could find themselves making quick gains as
another company comes along and tries to make a deal.
Indeed, the logic behind acquisitions has rarely been so strong.
Sales andEPS growth for many companies are finally set to cool in
2012 after robust gains in 2010 and 2011. So the only way to keep
the top and bottom lines moving is to spend some of the massive
amounts of cash that has been built up during the last few years on
acquisitions. (Lam Research had $2 billion in the bank as of the
end of September, for example.)
Why haven't we seen more mergers and acquisition (M&A) deals in
2011? Because many executives are loathe to deal when the
is at risk of falling into
. A slumping economy can turn a promising deal into an albatross
when sales and profits goals become impossible to achieve. Yet it's
increasingly clear that the U.S. economy is on the mend. Weekly
are falling, and other recent economic data points have been more
solid than in prior quarters. In effect, the economy should be
growing at a slow pace in 2012, but not shrinking, giving
strategists a smooth environment in which to make deals.
Here are three sectors that may be the focus of M&A dealings in
2012. If you can get in on any of these stocks before these deals
transpire, you're likely to reap some nice gains...
1. Chip-equipment stocks: ASM International (Nasdaq:
It's no coincidence that Lam and Novellus decided to join forces.
The entire sector has been consolidating in recent years.
Applied Materials' (Nasdaq:
$4.9 billion purchase of Varian Semiconductor Equipment turned many
heads in the industry, not just for the lofty purchase price, but
AMAT's signal that key players need a broad arsenal of tools to
develop the deepest relationship with chip makers like
Texas Instruments (NYSE:
Might Netherlands-based ASM International be next? The euro has
been falling steadily throughout the fourth quarter, making
European businesses even more attractive to U.S. buyers. ASM sells
a wide range of chip-making tools, and a recent slowdown in growth
after robust top line gains in 2010 has pushed this stock down 40%
now trade for about 1.5 times trailing sales and less than seven
times trailing profits. Any potential buyers can take comfort in
the fact that
free cash flow
has always been strong, regardless of the economic climate,
averaging nearly $100 million annually in the past five years.
2. Energy: Sandridge Energy (NYSE:
Even as natural gas prices remain depressed, many companies are
still aiming to add to the amount of acreage they control, looking
ahead to the when gas prices rise and these energy fields
really impressive returns. Indeed, the energy sector has been the
focus of much of the deal-making in 2011, led by
Kinder Morgan's (NYSE:
$21 billion proposed purchase of
El Paso (NYSE:
earlier this quarter. This M&A trend should last as long as
sector shares remain in a funk.
Who might be in play? Look for companies that have sought to
aggressively expand, but now find themselves short of capital to
fully exploit their holdings. Sandridge Energy, which owns very
, has made investors nervous by possibly biting off more than it
can chew. "The firm's aggressive development plans point to
tightness over the next several years," note analysts at
Who might look to acquire assets at reasonable prices? Look to the
energy firms that have the strongest balance sheets and greatest
financial firepower. This means companies such as
Apache Corp. (NYSE:
Devon Energy (NYSE:
Noble Energy (NYSE:
could be potential acquirers in 2012.
3. Consumer Products: Clorox (NYSE:
Avon Products (NYSE:
Spectrum Brands (NYSE:
When it comes to handicapping potential M&A plays, you can look
for companies that have already seen
interest before. This past summer, corporate raider Carl Icahn set
his sights on household goods giant Clorox. He offered $76.50 a
share and hinted he'd be willing to go even higher. Clorox's board
issued a resounding "no thanks," suggesting shares were worth far
Well, since then, shares have pulled back to about $65, so Icahn
may look to make another run at Clorox. Might
Procter & Gamble (NYSE:
, with a
of $178 billion, look to
$11 billion or $12 billion for Clorox (or at least $83 per share)?
This might be enough to get Clorox's board to play ball, which
would help P&G expand its set of brands. From fiscal (June)
2008 to fiscal 2011, P&G's sales slightly rose from $79 billion
to $82.5 billion. The top line is expected to expand quite modestly
in fiscal 2012 and 2013 as well. Clorox would help jumpstart
P&G's flagging top line.
If Clorox still doesn't want to talk about a deal, then P&G may
want to check out Avon Products, which has seen its shares fall by
half in 2011, erasing $7 billion in market value.
Also, Spectrum Brands, which owns brands such as Rayovac,
Remington, Spectracide and George Foreman, has seen its shares move
down nearly 30% from the 52-week high. Spectrum's high
(with more than $1.5 billion in
) has spooked some investors. But P&G's $3.5 billion cash hoard
could pay off that debt and provide the capital to further extend
Spectrum's presence in its various market niches.
Risks to Consider:
If the economy slows anew in 2012, then deal-making would
likely grind to a halt. You may find yourself stuck with one of
these stocks as a result. Keeping that in mind, it's important to
find a stock you think is either already fairly solid or has little
downside from current levels.
Action to Take -->
Keep in mind these are simply buyout candidates, not companies that
have been the subject of buyout rumors. But all of these candidates
operate solid businesses and would make solid tuck-in acquisitions
for bigger rivals in their sectors. Worst case scenario, you may
find that scooping up shares of one or more of these companies
might make a solid long-term holding. Best case scenario, an
acquisition announcement turns into a quick gain.
-- David Sterman
Disclosure: Neither David Sterman nor StreetAuthority, LLC hold
positions in any securities mentioned in this article.