Catching Up With Three Takeover Targets

Merger activity is back, and in most cases, the acquirers' stocks have been having a very favorable reaction. We expect the pace to continue in earnest, as low interest rates and increased CEO confidence drive a rebound in deal activity. In addition, acquisitions of companies that have an international domicile can lead to a big tax break for the acquiring company (tax inversion). One of the 10 stocks identified in our May 16 article was International Game Technology (IGT), which seems to be up for sale with a lot of interested parties. The stock is sharply higher since our previous article, as it appears that the company has put itself up for sale. We like our May 16 list as a good starting point to build a portfolio that will benefit from the current takeover binge. Our three favorites from the list are Hologic (HOLX), Symantec (SYMC) and TE Connectivity (TEL). Hologic continues on a solid turnaround path under newly appointed CEO Stephen MacMillan. MacMillan is refocusing the franchise back to its strengths in imaging technologies and molecular diagnostics, while pushing for more international sales. Year-to-date sales and earnings have been above analysts' expectations. With a mid-cap valuation level of $7 billion and key activist investors (including Carl Icahn) holding 20% of the shares, there is a reasonable likelihood that Hologic could eventually become an M&A target. Either in a takeover or as an independent firm, we think the stock continues to go higher. Symantec has been a bumpy ride for investors over the past year, with the stock zig-zagging between $18 and $30 per share. Recently, the board replaced a relatively new CEO for lack of execution and falling behind industry trends. Business trends seem to be moving in a better direction. With the stock trading at $21.70, or 11x earnings, and the company holding a key position in enterprise security and back-up software, Symantec will either get its act together or could be vulnerable to being absorbed by a bigger player. TE Connectivity could be an emerging acquisition story. The company is a large ($14 billion in revenue and $25.2 billion in market cap), well-run and leading electronics components player. While few companies are big enough to consider a deal of this magnitude, the quality of the franchise and reasonable valuation, coupled with the potential for a tax-inversion deal whereby a higher-taxed U.S.-based corporation merges with a lower-taxed internationally based partner, might attract a large industrial or electronics company. TE Connectivity is domiciled in Switzerland and pays a low tax rate. Similar to Symantec and Hologic, we like TE Connectivity based on its investment merits and look at a possible takeover as the icing on the cake. We are expanding our original list to include Tibco Software (TIBX) and Eaton (ETN). We discussed Tibco Software last week, and Eaton is a well-managed company in good growth markets that also could be a tax inversion play. Our updated takeover bait list with the current companies we think are likely M&A candidates is as follows: Amgen (AMGN) Avon Products (AVP) Devon Energy (DVN) Eaton (potential tax-inversion play, new addition) General Mills (GIS) Hologic International Game Technology (seems to be up for sale) Kellogg (K) Teradata (TDC) Tibco Software (new addition) TE Connectivity (potential tax-inversion play) Symantec

Catching Up With Three Takeover Targets

Hologic, Symantec and TE Connectivity could all benefit from the current M&A binge.

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