Priced to Move

 | Dec 07, 2011 | 4:00 PM EST  | Comments
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This past weekend, technology giant SAP AG (SAP) announced plans to acquire cloud software maker SuccessFactors (SFSF) for $40 per share cash at a 50% premium -- a very nice treat for SFSF shareholders. Owning shares in a company that is ultimately acquired at a healthy premium is often more luck than skill, but a welcome portfolio boost nonetheless.

There's no particular set of characteristics to identify one business as a better takeover candidate over another. Ultimately, it's what the buyer is looking for and how much it will cost. While it's mere speculation to buy shares purely in hopes of a takeover, there are attractively priced businesses that not only appear to be sensible investments, but may also be interesting takeover targets. Invest according to the merits of the business first and look at the potential buyout as a free option -- with a potentially big payoff.

Online pet pharmacy PetMed Express (PETS) recently caught my attention. The company's shares have been on a slow decline over the past year. Shares currently trade for about $9.25, barely above a recent five-year low of $8.58. But during those five years, both net income and book value per share doubled. Return on equity has averaged more than 20% over the past five years. The balance sheet is debt free, with nearly $3 per share in cash.

Pets are an important part of the American family, and expenditures for pet food and medicine are considered nondiscretionary household expenses. Last time I checked, the pet offerings at Amazon (AMZN) did not include most of the brands sold by PetMed. Its biggest competition is the local veterinarian, as many customers feel an obligation to buy pet care products at the vet's office. But considering that Amazon wants to sell everything under the sun, the allure of an online business like PetMed looks interesting. With a market cap of $200 million, PETS generates more than $200 million in sales from a customer base that exceeds 6 million. With more than $6 billion in cash, Amazon could pick up PETS and its customer base instantly.

As shares of Research in Motion (RIMM) are crushed by low tablet sales, the BlackBerry maker becomes attractive to a tech giant looking to capitalize on RIM's technology platform. Some shrewd investors, like Prem Watsa at Fairfax Financial, have bought into in RIM at prices above the current $17 level. As a standalone company, I don't how RIMM can ever compete with Apple (AAPL) again. The iPhone 4S continues to be the best-selling smartphone, which comes at the expense of RIM's BlackBerry.

The obvious question is which large tech giant does RIM fit best with. Its platform is still very popular with corporate clients, a valuable and stable market segment. And if players such as Google (GOOG) want to continue making a dent in Apple's market share, folding up a competitor is one very viable option. As short selling continues to drive RIM's share price lower, suitors are no doubt paying close attention.

Hundreds of billions of dollars of cash are sitting on corporate balance sheets, along with sensible valuations, have created a fertile buyout market. One can reasonably assume that companies won't hesitate to spend that cash on acquisitions.

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