Sunday, May 30, 2004

Picking takeover candidates

How do i go abt finding takeover targets ?
WARNING : repeated before, but worth adding again - my run so far can easily be attributed to luck, so what i think is a
winning strategy may be pure b.s

Here are the various factors contributing towards making a company a target :

  • The sector it is in is seeing consolidation - when this is the case, premiums are going to be low since the world is anticipating more deals
  • A company is trading at historic lows due to lack of short-term catalysts, but overall the business is safe
  • If a target satisfying b) has seen a lot of insider buying ( open-market purchases specifically ) it makes it even more attractive.
    Even though insider buying info is public, trading rules mean that a takeover is a few months away otherwise those insiders could be in trouble. This "long-term" nature makes the stock not react immediately to this info. But if you are a patient investor ....
  • The stock is trading at close to book value
  • The company has a lot of cash (and short-term investments) in hand
  • The company has been a target of (a hostile?) takeover before
  • A possible acquirer has hinted publicly (in interviews) that it is planning on acquisitions
  • The company has a strong partner with who it has gotten closer and closer over a long-period
  • The bigger player (and potential acquirer) has recently raised cash in a secondary offering or a bond sale, thus indicating an acquisition is being planned.
  • The target has cut costs (selling of seondary businesses, laying off people) making itself more attractive to a prospective buyer.
  • A larger player is facing increasing pressure from big shareholders / Wall St. to diversify and get better returns, forcing it to buy a smart/young company.
  • The economy/market is coming off lows, making it more likely that juicy targets will become more expensive as the recover proceeds. This makes a lot of companies to just buy instead of waiting.
  • A big player's stock has seen dramatic rise, giving it some power to buy smaller players using stock as currency.
  • The top guys in the companies making the potential pair have worked with each other before (or are related!)

There are a few more that i will cite when i take up individual cases, but the above are the most important ones.


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