Takeover Bait for Profitable 2013 Fishing

 | Feb 26, 2013 | 2:45 PM EST  | Comments
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On Friday, we offered up the reasons behind our conviction that merger and acquisition activity will likely pick up in 2013. While the list was led by increased business confidence, other essential factors included reasonable valuations, low interest rates, credit availability, improving levels of economic activity and pent-up demand for accretive corporate expansion.

Today, we will review some companies we outlined last week, as well as discussing a few additional names.

We look for increased consolidation in the energy sector. Many of the major international energy powerhouses such as Chevron (CVX), Total (TOT) and Royal Dutch lack significant North American natural gas exposure. Two domestic oriented exploration and production names that scream "buy me" as potential acquisition candidates, are Devon Energy (DVN) and Southwestern Energy (SWN).

Devon's strongholds are in the Barnett, Bakken and Canadian fields where the firm has more than three billion barrels of oil equivalent reserves. Southwestern Energy's strength resides in the Fayetteville fields, with about one billion barrels of oil equivalent reserves. Both firms are North American-centric dry natural gas and natural gas liquids producers, with increasing production in light sweet oils.

We think that the major international players should love these characteristics since natural gas consumption is expected to be the fuel of choice in the coming years due to its substantially lower cost and reduced carbon footprint. Both firms are selling at substantial discounts to replacement value. If, as we expect, energy-oriented acquisitions heat up in the coming year, Devon and Southwestern are our odds-on favorites to be acquired.  

One interesting international energy acquisition play is Anadarko Petroleum (APC). Anadarko has discovered several major, multi-billion barrel oil fields off the coast of Africa, which could have significant long-term economic value. Any of the global majors might find these assets of great interest as incremental sources of reserves.

The second group that should look tempting is composed of strategic business and product-line candidates. Harris Corporation (HRS) leads this group as a strong mid-cap defense-oriented firm with established product line positions focused on tactical military radios as well as diverse systems integration programs. As U.S. military spending declines, several of the major defense contractors such as General Dynamics (GD) or Lockheed Martin (LMT) might find Harris an attractive partner to enhance and diversify their revenue bases.

Among strategic targets in healthcare, Zimmer Holdings (ZMH) could be of interest, thanks to its strong product lines in orthopedic implants for hips, knees and trauma. Zimmer is a mid-sized, growing and highly profitable medical firm that would fit neatly into (and could be readily digested by) any large global healthcare conglomerate, such as Novartis (NVS), Medtronic (MDT) and Roche (RHHBY), looking for diversifying and accretive deals.

For strategic acquisitions in the technology sector, BMC Software (BMC) is a mid-cap name with strong product lines and an entrenched customer base in mainframe and distributed software systems. Oracle (ORCL) or IBM (IBM) could find interest in this company, particularly because an acquisition would most likely be immediately accretive.  

In the medical technology area we think there could be interest in Life Technologies (LIFE). On Jan.18 the company announced that they had hired investment bankers to assist in a strategic review, which only intensified a speculative rally in the stock based on its possible acquisition. Subsequently some of these gains were erased on rumors that the sale process has slowed as interested potential buyers (both strategic and financial) were not willing to pay the kind of premium LIFE's board was seeking. We think the process is still early on, and something could very well happen at a price higher than its recent close.

A final strategic candidate, in the consumer discretionary sector, is the apparel company Deckers (DECK). Deckers is arguably a one trick pony with its UGG shoes/boots, but it's proving to be a very good trick. UGG is a very popular franchise which might make sense for a company seeking to take advantage of the strong brand name and product offering. One caveat: while the stock is reasonable priced at 12.3x earnings, and we think it could be an attractive investment for the coming year, we don't have a great sense of the earnings report later this week, and we would not be buying prior to the release.

The names listed above have significant investment merits besides their takeover appeal. The combination of the two, however should make this an even more profitable and dynamic basket of stocks. 

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